Perils & Pleasures
of Partnerships
Key issue for co-ops in business
partnerships: who do you trust?
By Kimberly Zeuli,
Assistant Professor
& Judy Turpin, student researcher
University of Wisconsin-Madison
Editor’s note: This is the second of three
articles with highlights from the seventh
annual Farmer Cooperatives Conference,
Cooperative Innovation, held last fall
in Kansas City. Part I appeared in the
Jan–Feb. 2005 issue. Part III will appear
in the May–June issue.
artnerships are businesses
formed when two or more
companies or people join
forces to accomplish more
collectively than they can
individually. According to Roger
Ginder, a professor at Iowa State
University, there are three general types
of partnerships:
- Horizontal partnerships (both firms
are at the same level in the value
chain); Example: Agriliance, an
agronomy partnership between two
regional cooperatives, Land O’Lakes
Inc. and CHS Inc.
- Vertical partnerships (firms that are
at different levels in the value chain);
Example: Land O’Lakes partnering
with local co-ops to build jointly
owned feed mills.
- Complementary joint venture with a
firm outside the value chain; Example:
West Central Co-op’s joint venture
with Todd & Sargent, a corporate
construction firm, to form the
Renewable Energy Group (REG),
which builds turn-key biodiesel
plants and provides start-up assistance
and ongoing plant management
for clients.
Ginder says that horizontal partnerships
between cooperatives and
investor-owned firms (IOFs) are one of
the most challenging partnerships to
establish and maintain. Two different
examples — with two very different outcomes
— of local cooperatives entering
into a partnership with Cargill were
presented at the Cooperative Innovation
conference.
Ag Partners LLC
Troy Upah, CEO of Ag Partners
LLC, described the creation and success
of his firm, a partnership equally owned
by Albert City Elevator, an Iowa farm
supply and grain co-op established in
1905, and Cargill. The two partners felt
that a joint venture would improve their
value to local farmers, improve efficiencies
and allow them to update facilities
they operated in an overlapping trade
area.
Albert City brought nine grain,
agronomy and feed facilities and 900
farmer-members to the partnership;
Cargill brought four similar facilities to
the partnership. In 1997, the two businesses
agreed to a five-year partnership.
Instead of updating some of the current
dry fertilizer facilities, the two companies built a new, 15,000 ton dry plant
to take the place of five smaller plants.
This saved $1 million that would have
been needed to upgrade the older and
smaller facilities.
The two partners operate
autonomously, with Ag Partners LLC
having decision-making power and
exerting influence on budget and
strategic planning. Upah cautioned
that the decision-making process for
the partnership, however, has to be
both business-centered and sensitive to
local concerns. Challenges to the partnership
have included initial customer
concerns regarding either partner having
a controlling influence, market
perceptions about Ag Partners operating
as a truly independent organization,
and supplier misconceptions
about the structure of Ag Partners
(which is often misconstrued as being
more of a Cargill entity instead of a
separate business).
These challenges were overcome,
and Ag Partners has been successful,
with improved efficiency and positive
financial results for both partners,
Upah said. Overall, “The value of an
investor-owned partnership lies in
greater access to resources — including
capital, risk management and marketing
— than each owner would have on
their own in Northwest Iowa. We also
gain a very strong board of directors
with industry knowledge and solid outside
perspectives,” he noted.
Agri Grain Marketing
Another Iowa partnership between a
co-op and Cargill that did not work
out as well is Agri Grain Marketing
(AGM). Created in 1986 by AGRI
Industries, a farmer-owned cooperative,
and Cargill, AGM was formed to
provide both partners with grain marketing
and other services. The partnership
went well until 2002, when problems
between the partners surfaced. By
2004, the partnership dissolved.
Sue Tronchetti, a board member of
AGRI Industries, described the partnership
failure as the result of a shift in
the business goals of both companies.
“Agriculture has witnessed many
changes from 1986 through the 1990s
that brought about changes in each
partner’s goals,” Tronchetti said.
The major difficulty AGRI
Industries faced in ending the AGM
partnership was the lack of a clear exit
plan. The co-op had to decide how and
when to end the partnership — which
were both contentious issues. There
were also considerable costs for ending
the partnership.
In the end, the partnership experience
with Cargill was not bad enough
to prevent AGRI Industries from
searching for a new partner, even
another IOF. The co-op started the
search by first assessing what it needed
from another firm and how to create a
partnership that would allow for easier
exit than the Cargill partnership had.
After consulting with industry leaders
and its members, AGRI Industries
decided to form a partnership with
Bunge North America, the North
American operating arm of Bunge Ltd.,
a successful global grain and oilseed
company. Bunge has worked extensively
with cooperatives in the past.
This time, the partnership agreement
included a commitment to the idea of an
evolving partnership and a detailed exit
strategy. As Tronchetti noted, “Always
trust your partner, but prepare for the
probability that the partnership may not
ultimately work out.”
How do you create successful corporate
partnerships? Since cooperatives
will continue to rely on partnerships
with other firms for a variety of strategic
advantages, what should they do to
ensure success? Two successful cases discussed
at the conference are summarized
below. Perhaps not surprisingly, the element
of trust is a key issue in each.
Global Berry Farms
Global Berry Farms LLC (GBF)
has an ambitious mission for a company
created just four years ago: to be
the premier fresh berry supplier to
North America. John Shelford, president,
described how GBF has structured
its relationship with three strategic
partners to ensure they achieve
their goal.
Michigan Blueberry Growers
Association (MBGA), a 400-member
marketing cooperative representing
25-30 percent of North America’s cultivated
blueberries, had a marketing
contract with Hortifrut SA, dating
back to 1991. Hortifrut is a closely
held family corporation representing
30-35 percent of all berry production
in Chile (raspberries, blueberries and
blackberries) and 40 percent of
Mexico’s fresh blackberry production.
In 2002, Naturipe Berry Growers, a
California marketing cooperative
founded in 1917 that represents 8-10
percent of California’s fresh strawberry
sales, became an equal partner.
The three organizations formed a
partnership called Global Berry Farms
LLC, with MBGA, Hortifrut and
Naturipe each holding an equal, 33.3
percent interest.
GBF sales have increased from $72
million in 2001 to a forecasted $214
million in 2005. Although it does some
non-partner business, it tries to keep
partner-sourced sales around 90 percent
of its volume. The partnership can provide
year-round fruit supplies to customers
who are no longer satisfied with
having to source fruit from multiple,
seasonal suppliers. In addition, its fruit
volume is sufficient to mount a serious
marketing campaign.
The partnership has not been without
its challenges. MBGA and Hortifrut
enjoyed a nine-year relationship;
however, neither had any prior relationship
with Naturipe. Therefore, trust
and confidence had to be built in the
years following Naturipe becoming a
partner. Since fruit prices are calculated
daily, trust is essential.
Perhaps more importantly, each of
the partners had pride in, and an emotional
connection to, the success of
their own operations. This pride was
difficult to put aside when they eventually
agreed to adopt the Naturipe
brand. As Shelford put it, “the
Naturipe brand was almost a deal
breaker.”
How did they overcome these challenges?
Two of the partners had a track
record which, Shelford acknowledged,
had a “huge impact on working
together.” Shelford had also worked 18
years at MBGA.
To build trust among the partners,
MBGA established an intensive agenda
of membership meetings and sent its
board to Chile to learn more about
Hortifrut. Board members also traveled
to California to learn more about
Naturipe. Employees were integrated
into a new team at GBF, which experienced
very little turnover.
Each partner has two representatives
(their CEO and their board’s designated
representative) on the GBF
board. All decisions must be unanimous.
Shelford admits that he was
skeptical of this policy at first, but now
endorses it wholeheartedly. He feels
that creating a united front is key to
their partnership.
Expenses are allocated based on a
fixed and variable basis to ensure equitability.
The partners work together to
develop their supplies.
Shelford offered this advice for successful
partnerships: (1) the strategic
considerations for a partnership must
be compelling; (2) the partners must
be willing to invest an inordinate
amount of effort into relationship
building; (3) they should communicate
the partnership’s vision often; and (4)
always deliver on promises.
Dairy Marketing Services
Rick Smith, CEO of Dairylea
Cooperative Inc. and chief operating
officer of Dairy Farmers of America
(DFA) came to the dairy industry after
briefly working as a teacher and then
as a lawyer — both careers providing a
unique perspective which he believes
has served his organization well.
In 1999, after years of intense competition
among dairy co-ops in the
Northeast, Dairylea and the thennewly
formed Dairy Farmers of
America (DFA) — decided to pool
resources to create Dairy Marketing
Services (DMS) as a larger, more effective
marketing organization for the
Northeast.
Today, DMS is a partnership among
three major co-ops (DFA, Dairylea,
and St. Albans Cooperative Creamery),
and has relationships with Land O’
Lakes, many small co-ops and 2,000
independent dairy producers. Smith
said this diversity of owners is the
strength of the operation.
The business structure of DMS
allows different groups of farmers to
participate in a single marketing unit.
“Every member can wear whatever coop’s
hat they want, but they go to the
market together, as one,” Smith said.
Individual identities are maintained, but
by combining the milk supplies of independent
and cooperative farms in the
national marketplace for the purposes of
creating efficiencies and the reduction of
cost on milk assembly, field services and
transportation, all dairy producers can
effectively and efficiently market milk in
the most profitable manner.
DMS also emphasizes transparency
and candor in its business operations,
which Smith considers essential for
building trust among partners. The
cooperatives have worked hard to
appeal to their consumers, most of
whom have some history of farming
and appreciate the dairy producers in
the organization.
This “team approach” to jointly
marketing milk has removed redundancy
and reduced the cost on milk
assembly, transportation and field services.
Together, this has generated
more revenues for sharing with all
dairy producers involved. Risk management
has also improved since the
joint venture was created. Smith
remarked, that “Any one of our cooperatives
could have been the best in the
market, but by working together, the
prices have been elevated and the
whole market is better off.”
DMS has been very successful, earning
praise from processors, producers
and the agribusiness community as a
model that has, indeed, created efficiencies
in all areas as well as high premiums
for producers. The co-ops are committed
to keeping the Northeast dairy
industry competitive through cooperation,
said Smith.
There are still 63 dairy cooperatives
in New York, and a fairly high percentage
of farmers who do not belong
to any co-op.
Smith believes that the key to successful
partnerships is commitment.
With the same level of commitment
from all partners, he says the governance
structure and other challenges
will work themselves out.
