New days, new ways
Co-ops, producers find many ways to prepare for the future
By Robert Heuer
tephen Longval knew his
grandfather’s grain business
was struggling
upstream in a changing
farm economy, and he was
determined to prevent it from dying. But
the Iowa farmer knew Sloan Cooperative
couldn’t survive with a business plan
devised in the 1930s. So Longval led the
effort a few years ago to merge several
local cooperatives, which then built a
railroad facility that allowed members to
sell grain to distant markets.
“Somebody has to do this business,”
the 59-year-old Longval says. “Farmers
are best positioned to do it for
themselves.”
Leading the way to change
A decade ago, Longval was elected
chairman of the 200-member Sloan
Cooperative. For decades, the co-op
operated an elevator that served a six square-mile area along Iowa’s western
edge. Member-owners hauled shelled
corn and soybeans to town where the
crops were sent to regional markets.
In the 1970s, the membership voted
to replace the 40-year-old elevator with
a new one that they thought would
meet their needs for years to come.
However, as farms got bigger, individual
farmers invested in huge combines,
storage bins and semi-trailers. Eventually,
members were going to bypass the
co-op, choosing instead to pocket the
nickel-per-bushel premium for hauling
corn to an Omaha terminal and beans
to a Sioux City area processor.
By the mid 1980s, the co-op was on
the verge of becoming an unneeded
middleman.“We spent several years figuring
out what the cooperative could do for
farmers that farmers can’t do for themselves,”
board chairman Longval recalls.
Knowing their business was in jeopardy,
the board faced a tough decision.
Many members were retired or nearing
retirement and interested in seeing
the co-op’s assets sold so that they
could get their share of the proceeds.
But Longval and others on the board
felt that the majority wanted to keep
the business going.
In 1995, Sloan saw an opportunity
to market the co-op’s Iowa grain to
California livestock operations. This
could be accomplished by tapping
into the Union Pacific Railroad main
line that ran through town. But with
only $15 million a year in annual sales,
the co-op couldn’t afford the $6 million
cost for a high-speed grain elevator
and track linking the elevator to
the Union Pacific line. Nor could it
hope to generate the grain volume to
justify such an investment. All of the
area’s local co-ops were facing similar
limitations. Ultimately, they merged
to form Western Iowa Cooperative.
CoBank, which finances cooperatives
nationwide, loaned Western Iowa
$6 million a sum representing 80 percent
of the 1,200 members’ local equity.
The co-op built a $6 million agroindustrial
complex that includes a
100 car rail-spur and a 600,000 bushel
elevator to load unit trains.
In 2002, the co-op generated $70
million in sales, providing members a
10 to 15-cent per bushel premium for
shipping corn to the West Coast. With
plans in the works to sell soybeans to
Mexico, Longval says, “We should survive
for awhile.”
A state of flux
Western Iowa Cooperative is far
from alone in having to deal with such
challenging issues. Cooperatives
nationwide are looking for better ways
to serve their grower-owners. Mergers
are on the rise. Successful businesses
realize their “customers” include both
farmers and consumers at faraway grocery
stores, as well as stakeholders
throughout the supply chain. To survive,
co-ops must find a niche in a
global agri-food sector that links producers
to suppliers, processors, distributors
and retailers.
Such realities were unimaginable in
the 1920s and 1930s, when Congress
enacted legislation to promote the
formation of farmer-owned cooperatives.
The regulatory framework that
governs the U.S. cooperative system
today continues to cater to the small,
diversified farms that populated the
countryside 80 years ago.
Lawmakers exempted producer associations
from anti-trust regulations so
members could pool marketing activities
and, as a result, get better prices
when buying and selling goods and services.
To help ensure farmer control
and equal influence for all members,
lawmakers required cooperatives to
generate the lion’s share of capital
internally (from their members).
Neighboring farmers formed small
cooperatives. They, in turn, banded
together to form regional cooperatives
that provided greater purchasing and
marketing power.
Throughout the industrialization
era, most farmers and ranchers have
specialized in producing high-volume,
low-value commodities while other
businesses focused on processing and
marketing. But increasing numbers of
cooperatives are developing methods to
capture a larger share of the consumer’s
food dollar.
Co-op leaders say that collective
action offers the means for farmers and
ranchers to capitalize on the forces that
are merging production, processing
and marketing functions. Questions are
arising about how to provide cooperatives
with the latitude to stake their
claim in the new food delivery system.
Producer control
Several decades ago, North Dakotan
Mike Warner and fellow Red River
Valley sugar beet growers were tired of
selling their commodities to a processor
whose out-of-state owners refused
to upgrade the plant. So they formed a
cooperative and bought the company.
Designed to turn member-owners’
commodities into food products, the
American Crystal Sugar Cooperative
(ACSC) became what some say was the
first “new generation co-op.”
Unlike a traditional co-op that
serves an unlimited number of members,
ACSC is a closed co-op that sells
a limited number of shares. Each share
represents an obligation to deliver a
unit of production to the co-op. By
pooling resources to process and market
products, farmers turned a struggling
beet factory into the United
States’ leading beet processor.
“Farmers are still the guys at the
throttle,” Warner contends. “Slowly
but surely, I think farmers are going to
gain further control over the processing
of food. Over time, the demand
from end users for quality and value
will drive food processing into the
hands of raw commodity owners.”
Nowadays, Warner spends less time
raising crops and more time raising
awareness about the marketing clout of
closed co-ops. His 1996 speech made a
keen impression on Kansas rancher
Steve Irsik.
“I’m not a rah-rah co-op guy,” says
Irsik, whose family-owned enterprise
includes wheat fields, a cattle and dairy
herd and a cattle-feeding operation.
“Yet, for years I produced genetically
superior products and got paid commodity
prices. So, I’m intrigued by the
cooperative concept of developing a
delivery system that allows customers
to know where the product is coming
from whether it’s identity preserved,
genetically engineered or organic.”
Irsik is a founding member of the
21st Century Alliance, an umbrella
organization that has helped farmers
launch six value-added co-ops in the last
five years. As a production network,
such enterprises can control both a sizeable
amount of land and raw product.
This gives end users something that a
General Mills or ConAgra cannot: a
verifiable connection to specific farmers.
Alliance officials estimate that 300
to 500 producer networks are forming
nationwide to pursue value-added
opportunities. Nearly all are undercapitalized
and unlikely to acquire
necessary funding through traditional
cooperative financing mechanisms.
Irsik figures most of these businesses
will be hybrids in part, closed cooperatives
structured as LLCs and
pitched to prospective investors with
a plan to sell to private or publicly
traded companies.
Irsik is one of 375 Kansas, Oklahoma
and Texas farmers who own the 21st
Century Grain Processing Cooperative.
He sees capital access issues hindering
the growth of a business that supplies
tortilla and bread manufacturers in the
southwestern United States. “Too many
small investments by too many people
becomes cumbersome,” he says. “The
greater the ownership stake, the greater
the commitment to success.”
Restructuring needs
Texas farmer Jimmy Dodson doesn’t
have much experience with valueadded
businesses, but he’s got an opinion
on the future of cooperatives. Dodson
is a Gulf Coast cotton and milo
grower, and a board member of Farm
Credit Bank of Texas. The bank is a
member of the $111 billion Farm
Credit System, a nationwide network
of lending institutions owned by more
than a half million farmers, ranchers
and their cooperatives.
“Well-run cooperatives will continue
to thrive,” Dodson says, referring to
co-ops that offer value to customers
through competitive pricing of products
and services. “Cooperatives need
to be sensitive to market forces as they
affect customers of all sizes.
“There’s no question that co-ops
should be structured a little differently,”
Dodson says. “As farming operations
become larger, co-ops need to be more
flexible in their policies and governance
practices to provide competitive services
for all sizes of operations. Large
operations already qualify for discounts
and special services from manufacturers
and distributors, so co-ops must offer
these producers advantages like quantity
discounts, bulk packaging and board
positions. Keeping large operators
under the co-op tent will enable smaller
producers to continue to benefit from
their cooperatives’ economies of scale.”
This is, of course, a hot topic with
many cooperatives, especially in the
area of governance. Some say providing
proportional voting based on the
business volume a member generates
goes against the one-member, one-vote
tenant at the heart of cooperative principles.
But others, like Dodson, say
such a change has to be made if the coop
business system wants to keep large
producers on board in an era of consolidating
farm operations.
At a crossroad
Nationwide, many co-op boards and
managers are grappling with such difficult
ownership and structure questions.
Some are asking whether these enterprises
must lose cooperative status to
remain competitive? Or, as an Illinois
Institute for Rural Affairs report asks,
“Will agriculture be integrated by and
for the farmer, or for the benefit of the
suppliers, processors and distributors at
the expense of the farmer?”
These are two of the questions the
newly created Congressional Cooperative
Caucus will consider under the
leadership of Rep. Sam Graves of Missouri,
Rep. Earl Pomeroy of North
Dakota, Senator Larry Craig of Idaho
and Senator Blanche Lambert Lincoln
of Arkansas. This forum was created at
the behest of the National Council of
Farmer Cooperatives (NCFC) to modernize
laws governing cooperatives.
Terry Barr, who was recently named
interim CEO of NCFC, says farmer
cooperatives are, in essence, partnerships
formed because producers think
they can either make a dollar or save a
dollar through the pooling of resources.
“That need is as great today as ever,
possibly even more so now that the
food and agriculture industry consolidation
and globalization has fiercely
increased competition and the demand
for capital,” Barr says.
Doug Sims, vice chairman of NCFC
and in line to become chairman in January,
grew up on a western Illinois
farm. He recalls that co-ops provided
the best price for the seed, feed, petroleum
and tractors that the family
bought, as well as for the hogs and
grain that they sold. The same is true a
half-century later now that his cousin
runs the farm and Sims is chief executive
officer of CoBank. As the only
nationally chartered institution in the
Farm Credit System, CoBank provides
financing for 1,500 agricultural cooperatives
across the United States.
“What the founders of co-ops were
looking for years ago is very different
from what members want and expect
today,” Sims observes. “ Today, capital
needs often exceed members’ ability to
pay. Yet, the co-op model remains a
dynamic economic tool for producers
who realize they can accomplish much
more as a group than they can alone.
Our customers want to remain cooperatives,
but they also need the freedom
to adapt to new circumstances.”
Some co-ops are finding that the pursuit
of new opportunities could mean
losing their cooperative status and their
borrowing relationship with CoBank.
The Farm Credit System is seeking legislation
to modify the Farm Credit Act,
allowing CoBank to finance all farmerowned
cooperatives, including new generation
co-ops. The bank wants to
finance entities that have both a producer
and investor class of membership,
provided that the producer class holds at
least 50 percent of the voting control
and operates on a cooperative basis.
South Dakota Soybean Processors
(SDSP) is one such cooperative that
both wants to tap new opportunities
and remain a CoBank customer. SDSP
was formed in 1993 by farmers tired of
exporting soybeans to a distant processor
and then paying freight on soybean
meal shipped back and fed to livestock.
The processing co-op has begun supplying
a manufacturer that turns oil
resins into industrial products.
With demand for products exceeding
members’ supply capability, SDSP will
generate significant new sources of nonpatronage
income. To avoid double taxation
for the cooperative at the entity
level and members paying on their share
of the proceeds SDSP has converted
to a limited liability corporation (LLC).
SDSP remains true to cooperative
principles, such as the one-member,
one-vote policy, CEO Rodney Christianson
says. “Who we are is not necessarily
determined by the business structure
that we use for tax purposes. The
farmers’ task of capturing a greater
share of the food dollar is a difficult
one. Government regulations should
not tie their hands to only one acceptable
business structure.”
Many other cooperative leaders
nationwide are reaching this same conclusion.
Cooperative principles have
the best chance of enduring if the business
structures are able to adapt to new
opportunities, Christianson says.
The power of numbers
“Co-ops provide a layer of strength
for producers through added buying
and selling power and marketing strategy,”
Wisconsin dairy farmer Scott Maier
says. “If a lot of private companies had
their way, they’d flush out the co-ops
and dictate the price that we get for our
product. The co-op gives you a little
more control. If the co-op makes a profit,
you either get a dividend or management
invests the money into
expansion with the goal of
providing additional benefits
to members in the future.”
Maier, 38, and his wife,
Daun, are NCFC’s 2002-2003 Young Ambassadors.
The Maier family partnership
belongs to seven cooperatives,
including dairy manufacturer
and marketing cooperative
Foremost Farms USA. Last
winter, they expanded from
275 to 450 cows. “With cattle
and milk prices down, we
hope to catch the up-trend in
prices,” Scott explains.
“Belonging to cooperatives
gives us a little more stability.
Cooperatives give our industry
a much stronger voice to
the people who make policy.
We’re not going to be left out
in the cold.”
And neither is Doug Carstens, who
chairs the board of Farmers Cooperative
Company (FC). His co-op is helping
to position central Iowa grain producers
for the future. For decades, FC
was a typical small-scale supply and
service cooperative catering to farmers
near Farnhamville, Iowa.
In the last decade, FC bought or
merged with eight local co-ops or private
companies. Today, FC is modernizing
a dozen grain elevators along
main rail lines. Representing a membership
base of 1.2 million acres, FC
can deal directly with national suppliers
and buyers.
Clearly, consolidation is shaking up
the traditional cooperative structure.
“A decade ago, a big regional co-op
would take a grain buyer’s plan under
its arm and approach 10 locals,”
Carstens says. “Today, we can do for
ourselves what we needed the regionals
to do just a few years ago.”
Ronnie Mohr serves on the board of
directors of Land O’Lakes. The Arden
Hills, Minn. based company provides
1,300 member cooperatives with feed,
seed, plant food and crop protection
products. Mohr sees “merging local
cooperatives taking on the role of
regionals, and the regionals becoming
more national in scope.”
This 54-year-old Indiana hog and
grain farmer recalls, “When I was in
high school, 28 families made a living
on the 3,600 acres of land that my
brother and two sons now farm.
Nobody’s more aggressive in mergers
and acquisitions than American farmers,
and technology has let us do it.
Big, full-time farmers are increasing,
mid-sized full-time farmers are
decreasing and part-time farmers are
increasing. To succeed, you have to be
aligned with other people.”
Land O’Lakes operates plants from
California to Pennsylvania, supplying
dairy products to national grocery
chains such as Wal-Mart Stores Inc.
Through Agriliance a partnership of
three regional farm supply marketing
cooperatives two of its owners, Land
O’Lakes and CHS Inc., continue to
negotiate savings for their members.
For example, it recently bought 20
percent of the Monsanto’s Roundup
herbicide. With such market share,
Mohr says Agriliance can add value just
as Wal-Mart does through purchasing.
Creating new advantages
Clearly, purchasing power, economies
of scale and owner equity give
some co-ops a marketplace advantage.
For others, their branded products set
them apart. That’s the story for Mark
Duffy, who is among the 1,400 New
England and New York dairy
farmer/owners of Agri-Mark. Agri-Mark sells a full line of Cabot-brand
foods that have been a century in the
making. The Cabot name commands a
premium price for members of the coop,
which also sells fluid milk.
“We can’t be the low-cost producer
of milk in the Northeast,” Duffy says.
“As a co-op, we need to take advantage
of other opportunities. All of our
advertising focuses on farmer ownership
and the places where the products
come from. We benefit from the fact
that an enormous number of consumers
respect what we do.”
Protecting a brand name at times
requires a co-op to make tough decisions.
Ken Kaplan, who grows 100
acres of plums in California and markets
them through Sunsweet Growers
Inc., knows this firsthand. He’s seen
Sunsweet, the world’s leading producer
of prunes, shift from a production-driven
to a market-driven business.
Formed in 1917 when the average
prune farm was 10 acres, the Yuba
City, Calif.-based co-op’s 650 members
now grow an average of 80 acres of
plums. For many years, Sunsweet
treated small growers the same as big;
whether a member delivered product
by the truckload or one box at a time
made no difference. In 1997, with the
industry facing overproduction, the
co-op imposed limitations on a longstanding
practice of advancing payments
to owners of unsold plum crops.
“The reality of the market was that
small growers needed the cash flow, but
we couldn’t borrow money against an
inventory declining in value,” explains
Kaplan, a Sunsweet board member.
“The viable farmer would be hurt
less short-term,” Kaplan continues.
“But a lot of growers weren’t viable
over the long run. If we were purely a
processing business, nobody would
have listened to the complaints. We’d
have sold product at the best price we
could. In a co-op, we had to listen, but
we also had to make the conscious
decision to stop subsidizing small
groves at the expense of efficiency.”
Meanwhile, Sunsweet has had to
accommodate the demands of grocery
chains seeking “category managers”
who supply all needs in a specific food
category. The prune co-op keeps its
position on the grocery shelf by
adding products such as apricots,
apples and juices bought from nonmembers.
Stepping outside the box
“Change itself is the biggest challenge
facing co-ops,” South Dakota
Wheat Growers Association (SDWGA)
chairman Jake Boomsma says.
Helping SDWGA’s 3,300 farmerinvestors
become more profitable, he
says, will inevitably mean stepping outside
“the cooperative box.”
In 2002, the 80-year-old SDWGA
business hired its first CEO from outside
the cooperative system. The board
was open to expanding across state lines,
doing business with private companies,
and offered equity stakes to outside
sources to finance expansion. In recent
years, the SDWGA has used traditional
funding mechanisms to invest over $40
million in two ethanol plants, a feedmill
and four train-loading elevator facilities.
SDWGA is now selling some elevators
to farmers who want to expand offrail
storage systems. “We get static from
rural leaders because closing down an
elevator takes business out of the community,”
Boomsma says. “But for our
business to survive, we need to make
tough economic decisions that provide
the best returns to our members.”
Conflicts of interest pose unique challenges
for co-ops because their members
are also part of the community. Indiana
grain and livestock farmer Myron Moyer
is also pushing for grower groups to gain
the opportunity to attract outside
investors so they can compete with corporate-owned businesses.
“I hope the federal government will
allow us to be able to partner with nonco-op businesses without losing cooperative
status,” says Moyer, who is on
the board of Harvest Land Cooperative.
“We are for anything that will
help producers compete.”
Editor’s note: Heuer frequently writes
on agricultural policy and rural development
issues for a number of publications,
including AgLender, AgriFinance, Farm
Journal, American Bankers Association’s
Journal of Agricultural Lending and
Independent Banker. This article is
printed courtesy of CoBank. It does not
necessarily reflect the views or policy of
USDA or its employees.
A fast-changing competitive
landscape is forcing
cooperatives large and
small to reinvent themselves.
The farmer-owned
business model, created 75
years ago by the U.S.
Congress, appears alive
and well, but may be in
need of updating. Some
cooperative leaders say
policies regulating governance,
capital formation
and structure need added
flexibility to keep co-ops in
step with a changing farmbusiness
environment. In
recent months, 60 federal
legislators have joined the
Congressional Cooperative
Caucus, which plans to
explore legislative actions
that can help farm co-ops
evolve with the times.
