CHS at 75:
Looking back, looking forward
By Dan Campbell, editor
e-mail: dan.campbell@wdc.usda.gov
taying power. That’s what it takes for any business
to survive and thrive for 75 years.
CHS Inc. is observing its 75th anniversary
this year as much more than just a survivor. It is
a diverse and growing Fortune 200 agribusiness
with $11.8 billion in annual sales. It serves 1,100 local cooperatives
with 325,000 member-producers and is poised to
pursue promising new industries.
The success of CHS is testament to the power of what a
producer-owned agribusiness can accomplish with the right
business strategies and the support of its members. From the
fuels it refines and supplies to member cooperatives, to the
grain it mills into flour and the oilseeds it processes into vegetable
oil-based foods, CHS strives to make sure producers
get the supplies they need to produce a crop, then adds value
to those crops to help return more farm dollars to producers
and their communities.
CHS predecessor co-ops were founded during the Great
Depression, when farming was literally a life-or-death struggle
for local co-ops and their producers. Farmers — then as
now — looked to their co-ops as crucial business partners
whose success or failure was inexorably linked to their own.
The nation’s newly mechanized agriculture industry was
increasingly looking for a dependable, fairly priced source of
fuel. Farmers also needed strong cooperatives to get their
grain to market and to return a good price for it.
Cenex (or Farmers Union Central Exchange) was established
in St. Paul, Minn., in 1931 to supply farmers with fuel
and other vital farm supplies. For grain handling, farmers
formed North Pacific Grain Growers Inc. (NPGG) in 1929
in Lewiston, Idaho, and Farmers Union Grain Terminal
Association (GTA) in 1938, also in St. Paul. These are the
three “rootstock” co-ops from which CHS sprouted.
NPGG and GTA merged to create Harvest States
Cooperatives in 1983. Harvest States in turn merged with
Cenex in 1998 to create CHS Inc. (The 1931 founding of
Cenex is being used as the official birth date for the combined
organization.) There have been many other mergers
with smaller co-ops along the way as the co-op has grown and evolved to meet the
changing needs of its members and the marketplace.
In a wide-ranging discussion with Rural Cooperatives in
early April, CHS Chief Executive Officer John Johnson and
Board Chairman Mike Toelle, a producer from Browns Valley,
Minn., talked candidly about the past and
future of CHS, and what its continued success
means to their members and rural
America.
Q. What lesson should we derive from the
fact that CHS has lasted for 75 years?
Mike Toelle: The basic business philosophy
that has helped us through 75 years
of success is the same one that is imperative
as we move into the future. Really, it’s
very simple: always focus on the organization
as a whole and make the best decisions
for the co-op and its members. This
requires a disciplined approach in the decisions
you make in the board room. You
might not be able to solve all the problems
of your members, so you need to focus on
those issues that you can address, positioning
the co-op to provide the most value
back to the members.
We operate on the co-op business model, which facilitates
CHS in returning more value to our members. One measurement
of that: in 2006 we returned $151 million in cash
including patronage and equity redemptions — a record.
That is another type of added value that flows back to our
members and their communities from this cooperative.
Q. CHS has grown through mergers, perhaps the biggest being
the Cenex-Harvest States merger. What factors made that a good
fit, and what were the biggest problems to be resolved to make it
work?
John Johnson: “The process started in late 1997 and concluded
in June of 1998. There
was about a 90-percent overlap
in the membership of the two
companies. When we looked at
the future of agriculture, it
became pretty clear to us that
integration between the supply
side of the business and the marketing
and processing side would
be in the best interest of producer-farmers. Leadership — boards
and management — endorsed
the vision for coming together.
Some mergers don’t work, but
this had a lot of strategy behind
it and alignment with leadership.
All the stars lined up to create a
very successful merger. From
there, it was all about execution
of the strategy. The two CEOs
— Noel Estenson at Cenex and
myself at Harvest States — were
totally aligned regarding what we
had to get done to organize the
new company. We divided the duties — Noel took
on more of the political and board work, while I
took on more of the operational aspects. This gave
us the focus we needed to execute the merger in a
relatively short period of time, with very few hiccups.”
Q. Some of your local co-ops have grown substantially
in recent years, some even attaining the designation
of “super local” with $300 million or more of sales
annually. How does this change the role of CHS in
meeting their needs?
Johnson: “Consolidation on the retail side has
been ongoing and probably has accelerated in the
last 5-6 years, resulting in some “mega” local coops.
The unification of Cenex and Harvest States
really helped us become a better provider of supplies
and marketing to them. Size and scale
become very important when we serve
co-ops of that size. The merger of
Cenex and Harvest States was an
enabler for a lot of other co-ops to consider
mergers. A lot of co-ops that were
purely supply or purely marketing have
been able to unify their efforts to
become an integrated supply and marketing
co-op, just as we have done.”
Toelle: “On the supply and output
side of the business, when we put Cenex
and Harvest States together, we looked
at them as complementary businesses
that would be better poised for the
future of agriculture as one co-op. I
believe that is what also happened at
the local co-op level.”
Q. CHS has taken over direct management
of some local co-ops that were struggling.
How has that been working out?
Toelle: We’ve not only taken over
some challenged co-ops and retail locations,
but in many cases local producers
have simply decided to merge with
CHS to gain added efficiencies from its
administrative and support services.
Their equity is now directly in CHS
rather than in their local association.
We call these CHS Country Operations,
and it has worked very well.
They still operate just like a traditional
local co-op, with a local board
and governance and local management.
That said, this model is not for everyone.
Some people really like it — it has
been particularly popular in Montana.
There has been slow but steady
growth in the program. More requests
come in every month; some of them
happen, some don’t. Many co-ops needing
to make a change in their business
still decide to merge with a larger
neighboring co-op down the road and
remain a part of CHS through their
local. What CHS is offering is ownership
options. Local producers have to
do the research and make a decision
based on what best serves the interests
of their producers.
Q. The biggest co-op failure in history
occurred a few years ago when Farmland
Industries collapsed. What lessons did you
draw from that tragedy?
Johnson: “Don’t ever let it happen!
It was an absolute shame. It comes down
to some very sound principles of running
your business. Some people have
the idea that it failed because it was a
co-op. That is furthest from the truth.
Really, it was due to business failures in
a company that was driven very heavily
by size — dollar sales volume
meant everything to Farmland.
They leveraged their balance sheet
to accomplish that objective, then
got into some business cycles that
were disastrous for them.
We want to grow, but to grow
on a profitable basis. Our discipline
is to make sure our balance
sheet stays strong, which means
the relationship with our bankers
remains strong. This enables you to
ride-out business down-cycles.
Farmland got heavily leveraged over the
previous 10 years. Then, when a bad
cycle hit — in their case it was fertilizer
and petroleum that were really in the
tank — they didn’t have the wherewithal
to get through it.
There is also a business culture issue.
We have a philosophy to undersell and
overdeliver. You should try to create
realistic expectations, whether with
your owners or bankers. Farmland had
a culture that would lead members and
bankers to believe that they were going
to achieve all these fantastic results, and
then never achieved them.
Again, I’m a firm believer that it
wasn’t their co-op business model that
created their failure, but it was some
business decisions that they made in the
10-year window prior to their failure
that caused it.”
Q. How aggressively has CHS been able
to move into Farmland’s former trade territory,
especially in places such as Kansas
and southern plains states?
Johnson: “Big time! It is our highest
growth area, for both farm supply and
grain, although farm supply is growing
even faster. Farmland’s failure created
an absolute void — from a co-op presence
perspective — in those markets.
Some of those co-ops were finding
other partners during that time, private
companies that stepped in there and
created alternatives for them. We had
been there for a long time, but we then
really stepped-up efforts to provide a
co-op solution for those local co-ops.”
Q. Have you encountered much anti coop
fallout, with producers saying: “We don’t
want to deal with any more co-ops?”
Johnson: “I don’t think so. There is
still a very strong co-op philosophy in
those markets. But
there is more of a
“show me” attitude.
Union Equity also
failed in that area,
and then Farmland
came in and eventually
failed. So there
is a track record of
regional co-ops there
not being successful.
But they were still
looking for a co-op
partner. We have
demonstrated that
we can deliver what we say; and there’s
a lot of security around our equity and
equity-revolvement plan.”
Q. Petroleum has been the biggest
income earner for CHS in recent years.
What is the outlook for that part of the
business, and are there any plans to expand
refinery capacity or acquire oil reserves?
Johnson: “We hold no oil reserves
— we are purely a refiner and marketer.
We buy crude oil from outside, both
domestically and globally.
Most of our business units have been
doing quite well, many having had
record years. But you’re right, our earnings
the last few years on refining margins
have been at points we’ve never
seen before in our history. We’ve reinvested
back in these plants. We’ve made
sulfur-reduction upgrades at both of our
refineries — at Laurel, Mont., and
McPherson, Kan. We’ve spent about
$400 million doing that and, in the
process, we also got rid of some bottlenecks
to improve capacity.
Now we’re spending $325 million at
Laurel, Mont., on a coker — a bottom
refiner that converts asphalt into more
refined fuel products. It will increase
capacity of the plant by about 14 percent.
We’re also taking a lot of the money
that we’ve been earning and reinvesting
it in renewable fuels. We’ve invested
about $70 million in a renewable
fuels/ethanol production company. By
the end of 2007, it will have an annual
capacity of about 550 million gallons,
making it the second largest ethanol
producer in the United States. So, we’re
doing what the market is demanding:
producing more energy products and
doing it by tweaking current plants for
extra capacity, as well as reinvesting in
renewable fuels.”
Q. Any plans to increase your 28 percent
share in ethanol producer U.S. BioEnergy?
Johnson: “Our share floats around a
bit. Since making our investment in
November 2005, they have added a
number of locally organized co-ops that
had been building ethanol plants, and
have now merged into U.S. Bioenergy.
With the last round of mergers, our
ownership dropped down to 24 percent,
so we invested another $35 million of
capital into the business. Now we are a
24-percent owner of a much larger
company than when we had 28 percent
of it. I expect to stay stable there for the
next year or so.”
Q. Is biofuels hurting some of your local
grain co-ops by taking away corn volume?
Johnson: “I wouldn’t say that it’s like
a loaded gun to their heads, but it is
hurting some. Ethanol is now eating up
as much corn as the export market. And
this is a phenomenon that has happened
in just the last five years. So a lot of
grain facilities that typically handled a
high volume of grain for export are
finding corn instead going for ethanol.
From our perspective, and that of a lot
of our locals, there are two sides of the
business: one is grain export, the other
is domestic demand for grain, as well as
farm supply. That diversification at the
local level will give them tremendous
staying power going forward. The market
is telling us it wants more corn production.
This year the numbers didn’t
come out like I thought. But there is a
lot of new seed genetics technology that
will expand corn production — maybe
in geographic areas where we don’t
grow a lot of corn today.”
Q. Does biofuel compete with CHS
petroleum?
Johnson: “They tie together very
well. There is some uniqueness there
for CHS. We probably are one of the
only ethanol producers that are
involved in fossil fuels refinement. We
are also the only fossil-fuel refiner that
is directly involved in ethanol production. So we are fairly unique. We look
at it as an absolute complement.
If you look at ethanol producers,
basically they are just that. They process
corn, make alcohol and push it into the
marketplace. What we can do at CHS
— because of our involvement in both
fuels — is link the demand-bases across
a lot of refiners who are facing the mandate
to produce more ethanol-blended
fuel. Whether it is Cenex, Exxon-Mobil,
Concoco or Phillips, all these folks need
to buy ethanol. We do exchange programs
with them on the refined-fuel
side, so we are the natural supplier for
their ethanol.
From a consumption viewpoint,
ethanol may be viewed as a somewhat
competitive energy source. But in reality,
because of the makeup of our business,
it creates an integrated platform
that we can successfully operate from.
Q. What are the odds that oil prices
could drop sharply and cut the legs out from
under the biofuels industry?Does growing
interest in switchgrass and other non-grain
fuel stocks worry corn producers and ethanol
co-ops?
Johnson: “Long term, biomass technology
is probably where it is going to
go. I don’t know if that is 10 or 20 years
out. The technology is not yet very
good. When you think of the efficiencies
of converting switchgrass, corn
stover and all the other biomass materials,
the question is: how do you collect
those feedstocks economically so that
they can compete with corn? Today,
that really can’t happen. So I don’t view
it as a near-term problem.
When we look at the spread between
corn values and crude oil prices, I think
that spread will stay there for some
time. If I have a fear regarding ethanol
production, it is around the corn crop.
Corn is at something like $2.25 per
bushel, but if we had a significant
drought across much of the United
States, it could drive corn values to
extremely high levels, like $4 or $5 a
bushel. That could be devastating to
ethanol production. Longer term, looking
at averages — with the spread
between corn and crude oil prices — it
is a very good economic model.
Q. Grain marketing margins seem to
get slimmer all the time. What can CHS
and its members do to improve efficiencies
to make grain marketing more profitable?
Johnson: “Our grain marketing has
been pretty profitable — even stellar
the last couple of years. But on a per
bushel basis, you are exactly right.
Margins are very slim. There again, values
we generate from grain marketing
are not dependent on buying and selling
grain. That is where you see the
very low margins. Really, CHS is a
logistics provider, which means, yes, we
buy and then sell grain to domestic and
global customers. But the value we
bring is in logistics, risk management
and transportation. We get paid for
that. To me, the low margin you see in
grain trade is a phenomenon of the
business, but the companies that can
provide the other kinds of attributes to
customers can get paid very well for
that.”
Q. What prompted CHS to get involved
in Brazilian soybeans?
Johnson: “As we deal with global
customers, primarily China — which
now demands about 40-plus percent of
global soybeans — it is pretty evident
that those customers need a supplier
that has dependability 12 months per
year. About half the global supply of
soybeans today is produced in South
America, the other half in North
America.
We established three origination
offices in Brazil about three years ago.
We walked before we ran, and it’s been
extremely successful. We supply beans
from South America primarily to
Chinese customers. But as soon as we
know we can be competitive selling
North American beans, we are in there
selling them to customers.
If CHS is going to be a global supplier
of grain and services, we have to
be global in our origination — particularly
for soybeans.”
Q. Some producers are concerned about
growing competition from Brazil, given low
land costs and wages there. How can we
improve our competitiveness?
Toelle: One key advantage for U.S.
agriculture is our transportation and
logistics systems, which is second to
none. I’ve been in Brazil, and I can definitely
tell you it is a competitive advan-
tage for the U.S. But there is also a critical
need to improve the nation’s waterways,
especially along the Upper
Mississippi, where we have locks and
dams that are antiquated. With the rise
in energy costs, rivers are by far the
most efficient method of transporting
grain, farm inputs and other freight up
and down the river. Devoting more
resources to improving our waterways is
a key legislative priority for CHS.
On the trade front, as we negotiate
on the World Trade Organization, we
need to be very careful not to disarm
ourselves with legislation in a new Farm
Bill that would weaken our negotiating
position. We feel it may well be prudent
to extend the current legislation pending
the outcome of WTO talks.
Q. John, what have been your biggest
successes and disappointments while serving
as CEO?
Johnson: “I’ve been CEO, or the
equivalent, for 11 years. That’s a long
time for a CEO. The average in corporate
America is five years or less. I got
the job at a young age — 44 or 45. So
there have been some of both during
that time.
I feel very proud of the formation of
Ventura Foods in 1996. Here is a company
that has generated a 30-plus percent
return on equity ever since it started.
It was originally a very small organization,
but is now one of largest packagers
of oil-based food products in the
United States, with 16 plants. And we
did it with an international partner,
Mitsui & Co. of Tokyo. In 1996, business
partnerships were relatively new.
Going across the ocean and finding a
partner was somewhat revolutionary at
the time. The company continues to do
well, and our relationship with Mitsui
continues to be extremely strong. It has
allowed us to do other things with partners.
It took a lot of work from our staff
to put together.
An equal, or even greater, accomplishment
was the formation of CHS.
Think of it: two of the largest co-ops in
the U.S. were able to look at the future
and had the ability to put together an
organization like this, the 188th largest
company in the U.S. today. And it is
owned by farmers and co-ops. We’ve
been able to put together effective management
teams through all the acquisitions
and mergers. It’s ultimately all
about people and putting the best possible
people on the job to create a winning
team.
My biggest disappointment was certainly
that our Mexican foods division
didn’t work out as expected. I had a
vision of expanding our food business
and felt very strongly that we could do
it on our own. It turned out that we
could not.
Mexican foods was a great strategy,
but we failed at it. We bought some
companies at substantial discounts, but
probably got what we paid for. Another
eye opener for us, as well as for a lot of
other companies, is the need to make
sure that you have the skill sets to be
successful in companies that operate in
challenging management environments.
We ultimately came to the conclusion
that we didn’t, so we sold it. When you
are not succeeding, recognize it early
and do something about it.
I don’t dwell on mistakes. Everyone
in the management world is going to
make mistakes. If you think not, you are
fooling yourself. When you find yourself
in a situation where you can’t execute,
you make an adjustment and move
forward. We in management — as I tell
the board all the time — have got to be
careful about how hard you punish mistakes.
They will happen, because that’s
where innovation comes from — it’s
where people go out and look for new
ways to create value. The main thing is,
you don’t want to make the same mistake
twice. But when you make a mistake,
don’t live with it forever. Take corrective
action and move forward.”
Q. What is on the CHS drawing board
right now that you are most excited about?
Johnson: “Renewable fuels and how
they fit with our company is by far the
highlight right now. It is a very exciting
area that is growing extremely fast.
New plants are being considered each
and every day here. It holds a lot of
value for our member-owners.”
Toelle: “Part of the vision of CHS is
connecting producers with the consumer,
and we’ve been doing that on
the food side, especially in grains
through Ventura Foods. When you
think about the renewable fuels platform,
it presents another aspect of the
CHS vision: the producer-to-consumer
connection.”
Q. Can CHS and other co-ops help keep
more family farms in business, or is continued
drift toward industrial-scale farming
the only real future for U.S. farming?
Toelle: “Through our local co-ops
and country operations, our mission is
to provide value back to producers. We
think we offer a platform of access to
world markets, integration between
supply and grain outputs and food processing.
And we drive that value back to
the local level.
You will continue to have a diverse
makeup of farms in the U.S., depending
somewhat on geography and crop mix.
We certainly spread our value across all
producers. It is up to them to run their
businesses at the size and scale that they
think works for their operation.”
Q. There is much debate about states
adopting new co-op incorporation laws that
allow for a broader definition of what a coop
is. What factors are fueling this movement
and what does it mean for the future
of farmer-owned co-ops?
Johnson: “I’m not sure I even know
what a traditional co-op is any more.
There are a tremendous amount of different
structures being used, including
by ourselves. We are a traditional coop,
but — by the same token — we use
many different capital structures to
accomplish our objectives. An example
is our preferred-stock program that
trades on the NASDAQ. This is fairly
unique in the co-op world. But it doesn’t
interfere with our core co-op values
because this is non-voting stock.
Control and governance of the company
stays in the traditional form, with
producers. We use a lot of limited liability
corporation (LLC) structures. We
have LLCs with other co-ops, with private companies and even with international
companies.
The changes in state laws are mostly
being undertaken to accommodate flexibility
on capital formation. When farmers
come together to form a business,
whether it is for soy processing or
ethanol production, they want to access
farmer capital and outside capital. In
order to do that, these laws are providing
more flexibility to attract outside capital.
I don’t see anything bad about that as
long as the best interest of the farmers
and producers on a co-op basis is being
served. I would guess that you will have
a lot of co-ops that will look at these different
structures to see if they will help
accomplish their goals. It is really being
driven more by the need for capital formation
than anything else.”
Q. With such a large, complex business,
what steps does CHS take to ensure you get
board members with the kind of skills needed
to direct it successfully.
Toelle: “Our Member Services Dept.
provides extensive training in the country
for local co-op directors. Through
our communications, we also provide
education for local directors. That
becomes the platform where they
become experienced on the local level,
and creates opportunity to seek nomination
to the CHS board.
When we become CHS board members,
there is extensive, on-going education.
Every year, our board participates
in education at both the local co-op and
corporate-governance levels. We use
training programs of the National
Association of Corporate Directors and
the National Council of Farmer
Cooperatives.”
Johnson: “Election to our board is a
totally democratic process; we don’t
control who runs for board. It really
takes the best of the best to get on this
board. We make sure directors have a
good understanding of the environment
within the industries we operate in.
Four or five times per year, we bring in
industry experts to provide an outside
perspective and share their views of
these industries. Because we are global
in outlook, each year we take about a
third of the board on an international
educational trip.”
Q. Mike, any tips on being a good board
member and maintaining good relations on
the board and with management?
Toelle: When you are a producer
who also serves as a director, you cannot
come to a meeting with your own
personal business interest in mind. You
need to make decisions that are best for
the organization. Many times you will
be faced with making a decision that
might not be best for your area or your
farm, but you need to make a decision
because it’s best for CHS.
Foster a teamwork approach to making
decisions — teamwork among
board members and between the board
and management. Treat people with
respect, even when you disagree.
Another key to the success of CHS is
that we — the board and management
— work very hard to be open and transparent.
We’ve had that culture for many
years, and it creates a high level of trust
with our members, our business partners
and customers.
Q. How do you keep the pulse of what
members want from CHS, and has this
changed significantly during your tenure?
Johnson: “Communications and listening
to members is a core value for
this company, and plays a key part in
building our business plan. We do that
in a number of different ways. We have
a Members Services group that is linked
to local boards and management on a
monthly basis, and deals with businesses
strategies and developing management
skills. We have boards that are heavily
involved in director associations.
“I spend a fair amount of time in the
country at manager association meetings.
We do 13 mid-year-report meetings,
the idea being to go out to our
members midway through the year and
provide them an update on how the
company is doing, rather than surprise
them at the end of the year with good
or bad news. This usually involves an
operations report, as well as an extensive
workshop and question-and-answer
period. So there are a number of different
touch points at the local board or
manager level to make sure we have a
sense of what their needs are and what
challenges are facing them.”
CHS: a snapshot
CHS Inc. is a diversified, federated cooperative in the
energy, grains and food products businesses. It had 2005
sales of $11.8 billion and net income of $250 million. It
has 6,370 employees. CHS is owned by farmers, ranchers
and local cooperatives from the Great
Lakes to the Pacific Northwest, from the
Canadian border to Texas.
Major business divisions include:
Grains — CHS markets more than 1
billion bushels of grain annually in 60
countries, making it the nation’s largest
cooperative grain handler. It operates
many grain terminals and retail facilities.
Foods — CHS is a leading processor of
value-added foods. Its Ventura Foods,
LLC (with partner Mitsui & Co.) is a
leading manufacturer of margarines and butter blends,
salad dressings, sauces and vegetable oils. Horizon
Milling (a joint venture with Cargill) is the nation’s leading
flour miller and supplier of durum wheat. CHS
Oilseed Processing refines more than 1 billion pounds
of soybean oil annually. CHS Sunflower serves more
than one-third of the domestic kernel and in-shell market
and export markets.
Energy — CHS is the nation’s largest cooperative
gasoline and diesel refiner and a significant wholesaler
wholesaler
and reseller of refined fuels. The Cenex convenience
store chain is one of the nation’s 20 largest, and
it is the fifth largest propane retailer and produces a
wide range of lubricant products. It operates refineries
and pipelines, has its own truck fleet
and is now one of the largest suppliers
of ethanol-enhanced gasoline and markets
of biodiesel.
Agronomy — Through Agriliance LLC, a
joint venture with Land O’Lakes, CHS
markets crop nutrients and protectants
to producers through local cooperatives
and independent dealers in the
United States, Canada and Mexico.
Country Operations — CHS operates
300 local farm supply and grain facilities,
providing ag inputs, grain marketing
and other supplies and services.
Business solutions — CHS is a full-service brokerage
and risk management provider through its subsidiary,
Country Hedging Inc. and its 60-some branch offices.
Through Ag States Group, it offers insurance and group
benefit programs; it provides business consultation
services to 1,400 local co-ops.
Animal nutrition — CHS supplies livestock feed and
services from the Central U.S. to Pacific Northwest
with Payback brand feeds.
