The Prime of Prairie Farms Dairy

With its focus on earnings and its profitable track record, this Midwest dairy co-op has producers asking to become members

        As Fred Kuenstler settles into his first year as board president of Prairie Farms Dairy, he's finding the transition to be as smooth as a drink of the cooperative's chocolate milk.
        That should come as no surprise. After all, this dairy farmer has been a member of the cooperative's board for 31 years, and its treasurer for the past 11 years.
        Furthermore, his predecessor, Melvin Schweizer, is only a seat or two away, having remained on the Prairie Farms board after 26 years as its chairman.
        But if one thing makes Kuenstler's job easy, it's the very cooperative he is charged with leading. Prairie Farms Dairy is considered one of the most successful dairy cooperatives in the United States. Based in Carlinville, Ill., the 800-member co-op is recognized across the Midwest for its high-quality dairy products. From its humble beginnings in 1938, Prairie Farms has grown to become one of the nation's top five fluid milk bottlers, and, until recently, held a place on the Fortune 500 list of American companies.
        In the often dissenting dairy industry, there's a general agreement that Prairie Farms knows how to operate efficiently and profitably, says Ed Coughlin, senior policy advisor for the National Milk Producers Federation.
        "Prairie Farms has a unique ability to run a very profitable operation in bottling fluid milk," Coughlin says. "Most other cooperatives haven't had the success that Prairie Farms has had in that endeavor."

Although its largest product is fluid milk, Prairie Farms also churns out ice cream, cottage cheese, sour cream and yogurt.
Photos courtesy of Prairie Farms

        From his farm in Olney, Ill., where he milks 120 cows and grows grain on 1,000 acres, Kuenstler offers his answer for Prairie Farms' success.
        "What makes Prairie Farms unique is that its management and board have always been interested in making a profit, and returning that profit back to the producers," says Kuenstler, who was elected board president in late January.
        And that's just what Prairie Farms did once again last year. Celebrating its "sixtieth and best year ever," Prairie Farms achieved record earnings and sales. For its fiscal year ended Sept. 30, 1998, Prairie Farms reported all-time high earnings of slightly more than $50 million, an increase of 13.5 percent over the previous year. Dollar sales also made history at $933 million, a whopping $50 million over the year before.
        (Those figures don't include Prairie Farms' lucrative business with its five joint-venture partners. Those partnerships brought in more than $685 million in sales in 1998, an increase of nearly 4 percent from 1997.)
        And more high-water marks are expected.
"When I took over 12 years ago, I told the board and management that Prairie Farms would reach $1 billion in sales in the year 2000," says Leonard Southwell, the co-op's executive vice president and CEO. "But it's possible we'll do that in 1999."

Early members of Prairie Farms might hardly recognize their co-op today. Organized originally as Producers Creamery of Carlinville, it was later renamed Prairie Farms Creamery of Carlinville. 'Today, after more than 50 mergers, consolidations and acquisitions, it's Prairie Farms Dairy Inc.
'When we put Prairie Farms Dairy Inc. together in 1962, our total yearly sales were about $16 million," Southwell says. "In the last 10 years, our growth has been about $500 million."

Southwell attributes much of the co-op's growth to its acquisitions. On its own, Prairie Farms operates 17 plants and 36 distribution centers, and employs 2,100 people in eight Midwest states. But add in its five joint ventures and the numbers soar.
Today, Prairie Farms, its subsidiaries and joint ventures operate 30 plants, three warehouses and 68 distribution points for a total of 101 profit centers. You can find them in Illinois, Indiana, Missouri, Iowa, Kentucky, Tennessee, Michigan, Ohio, Oklahoma, Arkansas, Nebraska, and Kansas.

        All counted, there are 4,300 employees who add value to 3.8 billion pounds of raw milk each year. For Prairie Farms last year, the co-op's Grade A producer-members supplied about 75 percent of the needed volume. The rest was purchased from other co-ops, which also shared in the patronage earnings.
        All together, Prairie Farms partners and subsidiaries help the co-op produce a complete line of dairy products. Their largest use of raw milk - 80 percent - is for fluid bottled milk, equaling more than 3.35 billion pounds of milk. Other products include 30 million gallons of ice cream per year, 63 million pounds of cottage cheese (or some 7 percent of the nation's output), 30 million gallons of sour cream and dips, and 7 million pounds of yogurt. Orange juice and other non-dairy drinks total 46 million gallons per year.
        Why orange juice? "Many customers only want to do business with one dairy," Southwell says. "Orange juice processing is compatible with milk processing."
        Its diversified line of products accounts for a large part of the co-op's strength, according to Kuenstler. "Prairie Farms has long taken producers' milk and turned it into a product that can be marketed for added income," he says. "We were into value-added long before it became a buzzword.

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"Prairie Farms member Merritt Fitschen (second from right), seen here with his sons and grandson, has won numerous milk quality awards. He began milking in 1939 with three cows.

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A new, 1,500 gallon milk tank is pushed inside the milk barn at the Merritt Fitschen dairy in central Illinois.

        Kuenstler also believes Prairie Farms' success stems from its capable management team. Throughout its history, Prairie Farms has benefited from a small but capable team of managers who have navigated the company on its profit-making course. It started with Fletcher Gourley, the visionary pioneer who helped create the co-op in 1938.
        "There is no doubt he was the guiding light behind much of the success of Prairie Farms," Southwell says. And there was Schweizer, under whose 26-year guidance the co-op saw tremendous growth.
        "Prairie Farms has the best managers in the dairy industry," Kuenstler says. "They're completely dedicated. I can call Leonard Southwell on a Saturday morning, and he'll be there in the office, not out on the golf course. And the management team is like that, all the way down the line."
        Southwell has been Prairie Farms' manager since 1988. For years, he served as the co-op's No. 2 man behind the legendary Gourley. But Southwell has been connected with Prairie Farms since 1951, when he managed a small Illinois co-op that later merged with Prairie Farms.
        "Prairie Farms has been successful because we have avoided making any catastrophic mistakes," says Southwell. "We don’t shoot from the hip. We put a great deal of time and effort into any program we embark upon. If it's not going to do anything for the producers, we're not interested."
        That may be why so few members have left the co-op. "I could count on one hand the number of members who've quit and gone somewhere else," Kuenstler says. "That should give you some idea of the loyalty members have toward Prairie Farms."
        In fact, the co-op's blue-ribbon reputation is so strong, "there are producers in all areas where we procure raw milk who are asking to join Prairie Farms," says Southwell. But asking doesn't always lead to membership. "Prairie Farms is not a coop that invites all producers in," says NMPF's Coughlin.
        Says Southwell, "We don't want surplus milk. We take on members only as we need them. We pay top prices for quality milk because our products must be top quality. We're selective in taking on new producers."
        For the producers who are fortunate enough to be members, the rewards are high. Their pay price, quality and patronage averaged $16.70 cents per hundredweight in 1998 - 80 cents above the previous fiscal year. Prairie Farms saw not only historic earnings in 1998 but a record patronage of $28 million as well. Sixty percent of the patronage payment - or $1.37 per hundredweight - was made in cash June 1 of this year. In the past five years alone, Prairie Farms has paid out more than $110 million in patronage dividends.
        "By law, a cooperative must pay at least 20 percent of patronage dollars in cash," Prairie Farms notes in its 1998 annual report. "Prairie Farms has paid out at least 50 percent for the past 15 years."
        In addition, Prairie Farms operates on a 7-year basis in paying back allocated earnings. It considers this "a remarkable accomplishment" for the dollars involved. "We know of no other cooperative, strictly in dairy, that has returned to the producers the amount of money per hundredweight on their milk than has Prairie Farms," the annual report says.
        One other strong pull for member loyalty is the black-ink basis on which the coop operates. There is no debt. There is no check-off for capita retains or stock. "This co-op is financed strictly on earnings," Southwell says. "We currently have no money borrowed from banking institutions."
        For 1999, Prairie Farms' capital expenditure budget totals $14 million. That's down noticeably from $17 million last year, when the co-op began building an ultrahigh-temperature processing plant in Granite City, Ill. The $8 million plant will produce the co-op's soft-serve ice cream mix, half-pints of milk for vending companies, 5-gallon milk dispensers, and half-and-half cream for Prairie Farms' retail sales. It will begin operations in June 1999.
        Prairie Farms keeps its operations as cost-effective as possible. Its management staff is small. "You'd be amazed at the small size of our corporate office when you look at the size of our sales," Southwell says.
        In more than two dozen rural communities in several Midwest states, the best-paying jobs can be found at the Prairie Farms dairy plant. Much of the co-op's success is due to the "Prairie Farms family," says Southwell. "We work as a team from plant to plant. Very seldom do our employees leave our employment. Many work beyond the retirement age."
        Southwell also stresses that plant managers are given major responsibility for their operations. "We don't try to call the shots from the corporate office," he says. "They're responsible for the bottom line."

        So far, Prairie Farms has not considered a merger with mega-cooperatives. That isn't to say that Prairie Farms won't work with the dairy giants. Already, it has three joint ventures with DFA. Land O'Lakes is one of Prairie Farms' members, as are Foremost Farms USA and Associated Milk Producers Inc.
        Prairie Farms is closely watching the industry's formidable challenges - a changing customer base, the declining role of government, maintaining per-capita consumption of dairy products, and the ongoing struggle to remain competitive. It won't be an easy road. Prices, which reached all-time highs of about $19 per hundredweight in January, are dropping. "It would be unrealistic to believe that the coming year, 1999, would be as successful as 1998," the co-op's annual report says.
        But as this little giant in the dairy industry moves ahead, it will continue the strategy that has worked so well for so long. In August 1998, it acquired the Roelof Dairy at Galesburg, Mich. In January 1999, Prairie Farms acquired another company, Holland Dairy of Holland, Ind. More acquisitions remain a possibility. "We're always interested in pursuing acquisitions that fit with Prairie Farms," says Southwell.
        Kuenstler himself has given thought to how the relatively small Prairie Farms will survive in the world of mega-mergers and dairy giants. "But when I look at Prairie Farms' management, our diversification and our quality," he says, "I know our future is great."

        As part of its operations, Prairie Farms has several wholly- owned subsidiaries and joint ventures. One subsidiary, Ice Cream Specialties, manufactures and distributes all types of frozen treats, many with the popular North Star brand. Ice Cream Specialties has operating divisions in St. Louis, Mo., and Lafayette, Ind.
        PFD Supply is a non-dairy subsidiary operation. As a one-stop distributor of products to fast-food outlets, PFD Supply has more than 170,000 square feet of refrigerated warehouses in Granite City and Lebanon, Ill. It delivers more than 7 million cases of products each year throughout the Midwest.
        Another subsidiary, Pevely Dairy, was founded in 1887. The Pevely name became renowned for quality dairy products with the 1904 St. Louis World's Fair, and has since remained a market leader. Its distribution points are located in St. Charles and St. Clair, Mo.
        East Side Jersey Dairy, its fourth subsidiary, is a fluid-milk operation in Anderson, Ill.
        Prairie Farms' members also are half-owners of five joint venture companies.