Trading places
Fortunes of California rice co-ops took opposite
trajectories; as RGA faded, FRC ascended
By Jennifer J. Keeling
and Colin A. Carter
Editor’s note: Keeling is a Ph.D. candidate
in the Dept. of Agricultural and Resource
Economics, University of California, Davis.
Carter is a professor in the Department of
Agricultural and Resource Economics,
University of California, Davis.
fter nearly 80 years of
operation in California’s
Central Valley, the Rice
Growers Association of
California (RGA) closed
its doors in August 2000. Once a dominant
cooperative that handled more
than 70 percent of the total California
rice crop, RGA’s market share had
dwindled to just 5 percent in its last
year of operation.
While RGA’s performance and market
share began to decline in the early
1980s, the cooperative’s primary competitor
and sometimes ally — Farmers’
Rice Cooperative (FRC) — steadily
increased in size and significance in
California. This article is based on
interviews with members and management
of the failed RGA and the surviving
FRC. In addition, historical documents
and comparative financial analyses
were used in recounting the story
of two cooperatives and explaining
what factors may have contributed to
FRC’s success and RGA’s closure, while
operating side-by-side.
Shared history
In the spring of 1912, USDA sent
agriculturalist Ernest L. Adams to
California’s Central Valley to develop a
commercial rice variety. By 1915, a
strain of short grain rice was profitably
grown in California, and regional rice
growers had formed a marketing cooperative
known as the Pacific Rice
Growers Association (PRGA).
Fractionalization of the membership
eventually led PRGA to reorganize in
1921 as the Rice Growers Association
of California (RGA). In its first year of
operation, RGA marketed 43 percent
of the California rice crop; by 1926,
nearly 75 percent of the California rice
crop was grown by RGA members.
The young cooperative experienced
tough times during the Depression,
when RGA lost its first mill to a fire.
To complete a second mill, growers
were charged higher fees, resulting in
the defection of many Depressionweary
members. Once the new mill
was brought on line, RGA began an
advertising campaign to increase
domestic demand for its rice. The
campaign only met with limited success.
Most consumers preferred the
fluffy, long-grain rice that was produced
in Southern states, to the sticky
medium- and short-grain rice grown in
California’s Central Valley.
Following the unsuccessful domestic
promotion attempts, the co-op began
to focus more attention on Pacific Rim
markets, Puerto Rico and Hawaii, as
well as the domestic brewery and
breakfast cereal markets. These channels
would eventually become important
market outlets for RGA.
Following the end of the
Depression, RGA experienced several
years of sales and membership growth
that eventually prompted RGA’s board
to cap the cooperative’s membership.
In part due to these restrictions, a
group of RGA members left the co-op
in 1944 and formed the Farmers’ Rice
Cooperative (FRC), along with other
Central Valley rice growers. Through
the 1950s, RGA built or purchased a
number of rice processing facilities.
However, it was RGA’s purchase of the
S.S. Rice Queen vessel in 1960 that
marked the cooperative’s integration
into the shipping industry.
Model of success
By 1965, then RGA president and
San Francisco mayor Joseph Alioto
reported that “RGA’s sea-going vessels
have transported 9.3 million hundredweights
of milled rice” and contributed
to the creation of “the largest milling
organization in the world” (Westlund,
1968). Affirmation of RGA’s influence
came in 1971, when Eric Thor, then
administrator of the Farmer
Cooperative Service of USDA said
“RGA is one of the leading cooperatives
in the United States today. The
leadership of RGA is a model for all
cooperatives to follow” (Westlund,
1971).
Rumors of a possible RGA/FRC
merger surfaced in mid-1970.
Reportedly, only informal conversations
between management and board
members of each organization
occurred, but a joint statement
released by management of both cooperatives
initially seemed to express a
favorable view: “For some years we
have been making shipments of rice in
the same vessels and, by arrangement,
have been using the same loading and
unloading facilities. As a result of this
close association, it is only natural that
some thoughts should be directed
towards merging operations”
(Grundmand, 1970).
In addition to sharing facilities and
shipping expenses, RGA and FRC routinely
brokered their rice through the
same agent, Grover Connell of
Connell Rice & Sugar. However, no
merger occurred, and the two cooperatives
remained separate entities.
War, drought and flood-damaged
crops in Asia during the 1973-74 and
1974-75 crop years ensured RGA of
good export sales through the Food for
Peace, or PL-480, program. In fact,
demand for rice was so great that, in
his 1973 annual meeting address, RGA
Executive Vice President Robert
Freeland said “demand far exceeds
supply.”
However, the elimination of U.S.
domestic acreage controls in 1975
resulted in an estimated California surplus
of 18-23 million hundredweight —
or more than 50 percent of total U.S.
medium-grain rice production. By
1980, RGA’s members were again
enjoying good returns and prices that
were described by one manager as “The
best we’ve had. The best in the industry.
The best in the world”(Kirk, 1981).
Surpluses create challenges
Without acreage controls, however,
large rice surpluses accumulated once
again in the early 1980s. RGA entered
this critical decade by warehousing rice
in whatever space was available. At
times, these locations included a vacant
Safeway shopping center and an idled
Libby’s canning plant.
Piles of rice contributed to the
development of an international scandal
that became known as “Koreagate.”
Comet Rice, a private mill in Colusa
County, contracted with the South
Korean government to deliver 370,000
tons of medium-grain, 1981-crop rice,
but the firm only had 120,000 tons
available. The only other firms that
had sufficient stocks of this type of rice
were RGA and FRC.
The two cooperatives refused to sell
rice to Comet unless Grover Connell
was allowed to act as their agent.
However, the Korean government
declined to do business through
Connell because he had earlier accused
a high-ranking Korean official of taking
bribes.
A two-year stalemate ensued, ending
in 1983 when Ralph Newman, the
newly hired president and CEO of
FRC issued a public apology to the
Korean government and brokered a
deal through a third party. By breaking
ranks with RGA and negotiating the
sale of rice without the involvement of
Connell Rice & Sugar, the tradition of
collaboration between FRC and RGA
ended and a new era of competition
began.
Soon after the resolution of the situation
in Korea, RGA purchased the
facilities of Pacific International Rice
Millers Inc. (PIRMI) of Woodland,
Calif. However, an anti-trust suit filed
by the Department of Justice “(sought)
to prevent RGA’s acquisition of the
PIRMI rice milling facility and other
assets.” The Department of Justice
argued that RGA and PIRMI represented
two of the five largest rice mills
in California and RGA’s purchase of
the PIRMI facilities would “substantially
increase concentration in the
purchase of paddy rice in California”
(U.S.A v. RGA). RGA lost the case on
grounds that it had violated Section 7
of the Capper-Volstead Act and was
forced to promptly divest itself of the
mill.
FRC’s new strategy
While RGA dealt with the fallout
from antitrust violations, FRC developed
a new strategic direction that
focused on providing higher returns to
its membership. To meet that goal,
FRC’s management implemented new
programs in marketing, finance,
accounting, manufacturing, field services
and communications.
As part of the renaissance at FRC,
the cooperative eliminated its dependence
on the Calrice Transport (CRT)
vessel that it jointly leased with RGA.
This proved to be a sound move, as
the ship became increasingly troubled
by maintenance problems. FRC also
ended “costly and ineffective discount
programs,” increased emphasis on
medium- and short-grain rice production
and “established direct sales relationships
with all international trading
firms and major foreign buyers of U.S.
rice” (FRC Annual Report 1983-1984).
Over the next few years, FRC prospered
and was compelled to limit its
membership in 1985 as “any significant
additional volume will potentially have
to be allocated to lower return markets:
it could also require additional
plant capacity” (FRC Annual Report
1985-1986). In contrast, RGA closed a
large mill in Biggs and, as a result of
poor sales, bills were issued in lieu of a
final pool return for growers’ 1985
crop. By 1987, RGA’s management
announced a change in its marketing
focus from bulk to value-added packaged
rice products. Shortly after the
statement was made, RGA defaulted
on a $1.4 million lease payment on the
CRT shipping vessel.
By 1989, RGA’s deteriorating financial
condition and shrinking membership
numbers obliged the cooperative
to mothball or sell facilities in
Williams, West Sacramento, Westside
and Willows. Meanwhile, FRC decided
to close an unprofitable operation in
Puerto Rico, which was consistent with
the cooperative’s stated goal to change
from being “primarily an export-oriented
seller…to a sophisticated marketing
firm concentrating in stable, valueadded,
high-volume U.S. markets”
(FRC Annual Report, 1989-1990).
In this same year, as the last CRTrelated
lawsuits were resolved, RGA
was sued by PIRMI for trademark
infringement and Cal Rice Bran Inc.
sued the co-op for contract violations.
In 1989, David Long replaced outgoing
president and CEO Mike Cook.
The next year, RGA was nearly
forced into receivership when the
cooperative’s major lender, CoBank,
moved to close the firm after stating,
“We believe it would be better to have
an outside party assume control of the
company” (Martin, 1990). RGA’s line
of credit was cut off, preventing RGA
from paying dozens of employees and
leading to a protest outside the Sacramento
CoBank offices. CoBank alleged
that RGA owed $42 million in overdue
debt and interests. In order to stave off
imminent closure, RGA sold assets in
Puerto Rico, West Sacramento, Biggs
and Cheney.
Bill Ludwig assumed the presidency
of RGA in 1993 after David Long was
terminated. RGA’s workforce was substantially
cut and the cooperative was
estimated to control just 5-10 percent
of the California rice crop, down from
70 percent just 10 years earlier. RGA’s
membership now numbered 250, compared
to 2,200 in early 1986. In contrast,
FRC’s membership had grown
over time from an initial base of 60
members in 1944 to 1,350 in the cooperative’s
50th year.
RGA clings on with niche plans
In 1996, a new Farm Bill stipulated
an end to “government-bankrolled
crops and direct grower subsidies by
2002” (Gardner, 1996). Growers at the
FRC’s annual meeting were warned by
Ralph Newman to reduce planting by
at least 25 percent or “go out of business”
(Gardner, 1996). At the same
time, Central Valley rice farmers were
dealing with increased costs of rice
straw disposal, decreased water availability
and sagging world prices.
While market conditions eroded,
RGA tried to stay alive by exploiting a
niche-marketing strategy. In February
1997, RGA announced that it would
form a business, Ap-Rice, with Applied
Phytologics Inc. (API) of Sacramento.
As part of the agreement, some RGA
growers would produce genetically
modified (GM) rice that would be
milled and malted so that proteins
could be extracted for industrial and
medical use. Amid controversy, RGA
reportedly ended the agreement for
undisclosed reasons, but API continued
to contract with independent
growers in the Sacramento Valley.
Over the next three years, RGA’s
membership base continued to decline;
by May 2000, only 120-150 members
remained. During this time, RGA
maintained its focus and marketing
efforts on supplying niche markets. In
mid-2000, the cooperative announced
that it had reached a series of novel
trade agreements with the Philippines.
The deal had two parts, the first part
stipulating that RGA would help the
Philippines grow organic rice, which
RGA would then buy and resell in the
United States. The second part of the
deal required RGA to ship processed
rice to the Philippines, where it would
be traded for canned fruit, fruit juices,
tuna and other agricultural products,
which RGA would then sell in America.
Benefits from the trade agreement
likely came too late for RGA. In
August 2000, RGA announced that it
had missed payments to employees due
to credit-line problems. Later that
month, Bill Ludwig announced that
the cooperative was going to be dis-
solved and restructured as a “for-profit”
company, a move managers of the
cooperative had reportedly been considering
since 1997.
Ludwig said that the cooperative
was simply unable to compete in the
marketplace and he aimed to re-open
the new company in November of
2000. However, prior to the proposed
restructuring, several lawsuits would
need to be resolved. Among the pending
lawsuits were claims by L&S
Distributors, RGA’s largest California
distributor, that it was owed $51,000.
The California Rice Commission also
alleged that it was owed more than
$100,000 in back assessments from the
1995-96 crop years. Takenaka and
Co., an investment-consulting firm
from Los Angeles, also sued the cooperative
for $15,000 in unpaid expenses.
In November, Pacific Basin Rice
Products LLC agreed to
buy RGA’s Woodland mill
and rights to the Hinode
brand name. Upon the
dissolution of the cooperative
he had run since
1993, Bill Ludwig
summed up the struggles
of RGA stating, “There is
no future and no ability
to truly make a profit in
the rice industry in
California” (Ferraro and Schnitt,
2000).
Financial consequences
Effects of the very different goals
and business strategies pursued by the
RGA and FRC boards and management
are evident when financial
records for the two cooperatives are
compared. Analysis of financial statements
from the critical 1980s shows
the different paths that the cooperatives
embarked on.
A measure of net proceeds — the
amount of money received from sales
after deducting all transaction costs —
is regularly used to evaluate cooperative
performance; it is the closest co-op
figure to business profits. In Figure 1,
net proceeds for both FRC and RGA
are compared from 1983 to 1991.
After 1983, RGA’s net proceeds continually
decreased as the co-op lost business
and gave-up market share in
California to FRC.
In 1990, RGA’s net proceeds were
just 1/16th the size of a decade earlier.
During the same period of time, FRC’s
net proceeds steadily increased at an
annual rate of 10.82 percent, and
remained relatively stable compared to
RGA. Increases in net proceeds at
FRC were driven by gains in net marketing
pool proceeds, a term analogous
to RGA’s net sales, indicating that
growth in net proceeds at FRC were
driven by increased sales and market
share gain. Continued decreases in
RGA’s net proceeds may in part be
attributed to the co-op’s decision to
implement a capital-intensive, nichemarketing
plan in 1987.
Prior to RGA’s decision to change
its marketing focus to serving valueadded
markets, the cooperative’s
debt/equity ratio was relatively stable
and low. To illustrate, between 1964
and 1982, RGA’s average debt/equity
ratio was 1.63, with a standard deviation
of .79. However, in the decade
that followed, RGA’s average
debt/equity ratio more than doubled,
to 4.95, with a standard deviation of
3.9. Major sources of variation in the
debt/equity ratio can be attributed to
fluctuations in liabilities. RGA accrued
a large amount of debt that was used to
finance the co-op’s value-added marketing
plan.
A big jump in the debt/equity ratio
occurred in 1989 when RGA divested
itself of two valuable assets, one in
Colusa County and another in West
Sacramento, without paying down a
significant portion of the co-op’s debt.
In addition, the cooperative lost several
lawsuits, the most expensive of which
required RGA to pay $4.5 million to
settle a suit involving the CRT shipping
vessel. These factors, in addition
to an over-valuation of
RGA’s inventory, resulted
in a very high
debt/equity ratio that,
among other things,
prompted CoBank to
attempt foreclosure of
the cooperative in 1990.
FRC’s debt/equity
ratio between 1983-1991
is reminiscent of an
RGA of earlier years, as
the ratio was both relatively
stable and low,
averaging 2.73 (with an average standard
deviation of .51). During the past
25 years, FRC’s average debt/equity
ratio has generally declined as strong
sales have allowed the cooperative to
pay down debt and an increased mem
bership base contributed to the cooperative’s
growing equity.
Why did RGA fail as FRC succeeded?
By studying the history and finances
of RGA and FRC, great differences in
the management style and strategic
direction become evident. The consequences
of pursuing divergent plans
are clear as one cooperative was successful
while the other failed.
However, questions still remain
about what specific factors led to the
closure of RGA and how the same fate
may be avoided at other cooperatives.
For answers to these questions, former
members and management of RGA
were interviewed and surveyed.
Interestingly, several of the main
reasons cited for joining RGA are
directly related to what members perceive
to be the causes of RGA’s failure.
This indicates a fundamental gap
between what growers expected
through cooperative membership and
what was borne out in reality. For
instance, some members indicated that
RGA had an appealing, differentiatedproduct
strategy. Ironically, former
members cite poor decision making by
management and the board — including
the decision to pursue a differentiated-
products strategy — as a chief
contributor to RGA’s failure.
Former affiliates also identify the
high cost of maintaining both the
cooperative’s assets and the contract
with the CRT ship as key factors in
RGA’s failure. Expenses from maintaining
numerous assets and the problematic
shipping vessel no doubt
diminished the higher-than-industryaverage
returns that initially attracted
members to RGA. Consequently, many
members left RGA after realizing
higher returns could be earned by
marketing through competitors such as
FRC, or through private mills.
Lack of attention by the board of
directors was reported as another
important contributor to RGA’s
decline. This survey finding was supported
by interviews with former managers,
who said the board was passive
and ill equipped to scrutinize the complex
business decisions it was charged
with supervising.
Moreover, both members and former
directors acknowledged that
RGA’s board was in need of greater
management and financial expertise.
Furthermore, our survey findings indicate
that RGA’s management was perceived to have been deficient in the
skills necessary to guide the cooperative
through tough times that included
periods of low world rice prices, industry
scandals and high costs of maintaining
the co-op’s assets and shipping
vessel contract.
Ultimately, the survey and interview
findings support the notion that
RGA’s closure was primarily the result
of a lack of board oversight and
expertise coupled with an ineffective
management. Other cooperatives
may empathize with the experience of
the Rice Growers Association.
However, if these organizations are
able to identify and address the above
problems and issues in their own
cooperatives, they may avoid the same
fate as RGA.
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RGA Will Be For-Profit, May
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Martin, Patricia. “RGA Sues Bank
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