Need for change trumpeted at NICE
Farm Bill Task Force proposes actions to reverse farm-income downward spiral
By Dan Campbell, editor
I n meeting rooms, hotel hallways and around banquet room dining tables, the relentless topic discussed throughout this year’s National Institute on Cooperative Education (NICE) in Atlanta was what role cooperatives should play in pursuing major changes to help restore the farm sector’s fiscal health. A young farmer from Montana, noting the large size of the check from USDA he’ll be getting as part of an emergency aid payment, said that money will keep him in business, but he looks at the aid as a type of welfare and wonders if there is a future in farming the way things are going.
He’s not alone. Half of all U.S. net farm income will come from government payments this year. Small wonder, when you look at what has happened to the farmers’ slice of the average “food dollar” spent by consumers, says Dan Kelley, GROWMARK board chairman. The farmer’s share is down to 20 percent, the lowest level ever and down from more than 37 percent of the food dollar as recently as 1973, Kelley said during an address at NICE.
“Farmers need greater opportunity to generate income from the marketplace,” Kelley said while presenting the findings of the National Council of Farmer Cooperatives’s (NCFC) Farm Bill Task Force. Increasing the farmers’ share of the food dollar by just one cent—to 21 cents—would generate an additional $6 billion in total income for farmers, he stressed. And an increase of 3 to 4 cents would offset all the government assistance paid to farmers, he added.
NCFC is supporting the Farmer Business
and Income Opportunity Act of
2001 as a means to help farmers better
manage their risk and improve income
derived from the marketplace. Kelley
said it will help farmers compete more
effectively in the global marketplace and
better capitalize on market opportunities.NCFC developed its recommendations during a series of meetings attended by cooperative leaders from around the nation. Some of the sessions were standing-room-only affairs, underscoring the urgency of the need to boost farm income.
The key is to improve access to capital and other programs that enhance cooperative efforts, Kelley said.
To improve access to capital, NCFC recommends:
• Raising the $25 million loan limit on USDA’s Business & Industry Loan Guarantee Program. Kelley noted that Plains Cotton Cooperative built its Texas denim plant for $25 million in the mid-1970s, but today that plant would cost more than $100 million to build.
• Clarifying lending authority under the 1996 Farm Bill so that traditional cooperatives would have the same ability to qualify for certain USDA loan programs as do newgeneration cooperatives.
• Eliminating the triple tax on co-op dividends.
• Providing co-ops with new tax incentives.
• Establishing new sources for equity capital; this is needed because financially strapped farmers are often unable to invest in projects desperately needed to develop new products or open new markets; new venture capital funds for cooperatives are thus needed.
Other provisions within the bill would seek to revitalize USDA’s cooperative programs by establishing the Farmer Cooperative Business Service as a separate agency and maintaining funding for USDA technical assistance grants for cooperatives. A Sense of Congress Resolution is also being sought to reaffirm congressional support for federal programs that encourage and enhance the ability of farmers to join together in cooperative self-help efforts.
“This may be our last opportunity (to enact needed changes),” Kelley said. “Farmers must work together to find ways to enhance their income.”
Don’t procrastinate, innovate!
In his lively NICE keynote address, Dennis Mullen, CEO of Agrilink Foods, also sounded the call to action. He used the example of a one-pound bag of corn to point out the crisis facing farmers. In 1991, that bag of corn cost 57 cents. Ten years later, the cost is 56.5 cents. “That is actual deflation,” he said. “Dairy, cheese, oats, beans—the trend has been much the same.”
Mullen said Agrilink has also seen the price for small ears of corn-on-thecob it supplies to fast food outlets, such as KFC, remain stagnant for nearly a decade. And some apple producers had to sell their crop for 8 cents a pound this year.
“People get raises, electricity and gas costs go way up, but our (farm) prices don’t keep up,” Mullen said. “We should band together to fight this,” he said. Innovation in the face of rapidly changing technology will be the answer for many successful cooperatives, Mullen said.
“Innovation is needed to provide products when and where consumers want them—you must provide customers with service that sets you apart.” He projected that in 10 years, “Walmart will dominate where we buy food, because it is the world’s best distribution company—it gets products to stores better and faster than anyone.”
Another food trend to watch is the growth in percentage of older Americans, which will drive increased demand for food perceived to be healthier and more nutritious. Mullen also noted that 70 percent of consumers believe organic foods are better for their health.
A decade ago, shoppers spent an average of 40 minutes in the grocery store, but today it is down to 18 minutes. “Today, meals are assembled rather than cooked, and dining can take place anywhere. I just saw an ad for a minivan with 17 cupholders!” Mullen said.
Agrilink, Mullen said, wants to redefine the word “commodity” by bringing growers and management together to find ways to add value to their products. Strategic thrusts for Agrilink include being the lowest-cost producer of products and services that meet customers needs through a program of relentless improvement, investment in innovation and developing new supplier partnerships.
Total customer service, development of a totally effective workforce and pursuit of profitable growth are goals driving Agrilink as it pursues its vision statement: “To be widely recognized for leadership and accomplishment as a food processing and marketing cooperative by using all of its members’ and employees talents.”
Are cooperatives getting too big?
In one of several sessions at NICE dealing with concentration, Charles Beckendorf, board vice chairman of Dairy Farmers of America (DFA), and John Reifsteck, board vice chairman of GROWMARK, talked about why their cooperatives have seen the necessity to grow to survive during a time when food companies are consolidating even more rapidly.
“The vast majority of growers say agribusiness is too large, said Reifsteck, who is also president of his local cooperative, Illini FS Inc. “But when we ask them if co-ops should be large enough to meet the competition, they also say yes.” This creates a major dilemma for cooperatives dealing with huge companies that may do more than $200 billion (such as Walmart) in sales annually, he said.
“We need efficiency to compete, but members are very concerned about concentration. Producers must have a competitive marketplace,” Reifsteck said.
GROWMARK has grown from a single-state operation in Illinois into a multi-state, international cooperative. But a “wave of proposed legislation and regulations” could threaten future co-op mergers, and will—at the very least—make it much more time-consuming and expensive for coops to pursue mergers, Reifsteck said. Some of these proposed new rules would trigger reviews at the attorney general level if a merged co-op would result in a new business with more than $100 million in annual sales.
But many local co-ops—including his own—are approaching $100 million in sales, he said. And these locals have even fewer resources than do regional co-ops to deal with a more cumbersome review process.
“Had these regulations been in place in the past, I don’t think we would be as good a co-op as we are today,” Reifsteck said. He noted that his father and grandfather were both co-op presidents, but said that if those co-ops had not grown over the years, there is no way they would be able to meet the farm supply needs of today’s sophisticated farms.
“It (adoption of the proposed laws) would be like closing the door on our co-op fingers as we struggle to compete. Why should we let legislators in Washington tell us what is good for our future? Who pays for it? We will,” he said.
“We’ve been through much consolidation, but it has all been done for the best interest of our farmers,” Reifsteck said. “At the end of the day, we directors go home and must deal with our sharpest critics, our neighbors and friends in agriculture.”
Why DFA pursued growth through mergers
Beckendorf described how DFA became the nation’s largest dairy co-op through a series of mergers. The genesis of DFA occurred in October 1996, he said, “when we lost 30 percent of our milk price in one week.” Beckendorf traced the price plunge back to the concentration among food companies and the dramatic drop in the number of large cheese manufacturers that resulted. Suffering the pinch of higherthan- anticipated milk prices for their raw ingredient, the large manufacturers simply sold off enough of their inventories of cheese to drive down the cheese market, on which farm milk prices are based.
He said the industry had also seen the number of milk processing plants drop from 2,800 to 500 during the past decade. “All this concentration left dairy farmers at a disadvantage because we had many more cooperatives competing to sell to fewer buyers,” Beckendorf said.
“We (the original four member co-ops) met at the Chicago airport that December, and we asked, what can we do? We can’t take price volatility like this.”
Another writing-on-the-wall event occurred about six years ago when a Pepsico official spoke at the National Milk Producers’ Federation meeting. Beckendorf said the beverage giant then had 28 suppliers, but said it wanted to pare down to just eight. “We weren’t big enough individually, as separate co-ops, to handle these types of national accounts,” Beckendorf said.
The eyes of co-op leaders were also opened on a trip to Holland in 1996, where “we saw that they were 20 years ahead of us in product development.”
DFA is now nearly four years old, and it just downsized its board from 119 members to 48 after a three-year transition period. “Members are still concerned that dairy farmers not go the same way as poultry and hog producers,” said Beckendorf, who, with his brother, milks 250 Holsteins in Tomball, Texas. “They don’t want to be piece workers nor to depend on government payments” to survive.
DFA has done substantial streamlining since its formation, closing 22, mostly older processing plants and consolidating 40 offices. Several thousand jobs were lost in the process, “but it was our dollars at risk,” he said. He points to the $33 million in earnings the co-op had last year, adding, “rising water raises all boats.”
Is DFA still fighting for survival? “Yes,” he said, but its odds are greatly improved thanks to the mergers. “Before, four of us, as large regional coops, were going to the same customers, each trying to undercut the other in the market.” DFA member co-ops (now seven in number) are no longer running parallel milk runs and there is less overlap (and therefore greater efficiency) in its processing plants.
“In a true merger, “ Beckendorf said, “all obligations of the members are retained.” DFA, he said, honored all equity owed by its member co-ops, dollar for dollar. “Not one of our dairy farmers has lost any equity. The merger strengthened our equity base.”
Agribusiness still comparatively small
In another session dealing with concentration, Steve Sonka, University of Illinois ag economist, said recent large mergers—such as Suiza Foods/Dean Foods, Cargill/Continental Grain, Dupont/Pioneer Seeds and Tysons Meats’ ongoing effort to acquire IBP meat packing— have made them all bigger, but they are still small fry compared to their cousins in heavy industry, petroleum and electronics. ConAgra today is a $12 billion company, ADM $9 billion, Tysons $4 billion and Dean/Suiza $3 billion. But consider that General Electric does $420 billion in business annually, Exxon/ Mobile $300 billion and Microsoft $300 billion.
“Wall Street continues to think most food companies are too small,” and that they are paying too much for their capital, Sonka said, adding that “agribusiness did not grow fast enough in the last half of the 1990s.”
“Why don’t we have 20 meat packers today? Because they would not be as efficient” [as the four or five that dominate the industry], he said. Today, there is much talk about the “evil vertical integrators” who have taken over pork production in the Southeast, Sonka said. “But when I was growing up [on a farm in Iowa], I was taught that corn farmers who also grew hogs were evil vertical integrators.”
The cost of analyzing data and communicating is dropping rapidly, Sonka said. “The world has changed. Walls came down. Information flows more freely today.” Less expensive technology makes vertical coordination better than vertical integration, Sonka said. He noted that Nike owns no bricks and mortar, and Microsoft owns little in the way of plants. Commodity returns, he said, are “just enough to keep you in business. Is that fair? Who cares? Not the market.”
Co-ops, Sonka said, need to look more to brand development, knowledge accumulation and risk taking, all of which have high value in today’s market.
Co-ops should focus on how to get producers involved in the world of
knowledge. If farmers would stop purchasing corn varieties that rank in the lowest 25 percent for yield, they could earn an extra $28 per acre, he said. “That’s easy money – more than enough to buy a jacket for the friend who sells you that low-yield seed.”
Sonka said co-ops are struggling to find successful value-added activity, but that “90 brands fail for every 10 that are successful. But the value of the10 that win will far exceed the value of the 90 that fail.”
Concentration is likely to continue and could even intensify, Sonka said. “It is valid to have concerns and emotions about this trend, but the real issue is performance. For co-ops, and for the rest of ag sector, the key will be boosting intangible assets.”
In response to questions about the ethics of co-ops competing with producers (in areas such as hog feeding), Sonka responded that producers should look at these co-ops as businesses they own which generate profits that they can share in. Learn why this activity is successful and bring that knowledge gained to your own operation," he urged.
How co-ops rate on accumulation of knowledge, and willingness to share it, will be a key in the future. "They should look to the auto industry model of the 1950s' buy a system and run it and see what comes out the other end. If it's bad, fix it."[end]
Good interview process crucial to selecting top-notch CEO
Of all the jobs a co-op board must perform, none are more important than selecting a CEO or manager to guide the business. Bernard Erven and Chris Bruynis of The Ohio State University led participants in a NICE management seminar through a series of exercises designed to help improve their odds for picking a winner.
“If the board makes the right decision, it will benefit the cooperative for many years,” Erven said. But if the board makes a mistake and picks a weak CEO, the board won’t be able to compensate for it in other ways.
“It’s similar to marriage: the alter does not correct what a person was when he or she walked down the aisle,” Erven said. You can’t motivate a misfit into being a good CEO, nor will on-the- job training make it right, he noted. The challenge is thus to find the right person the first time. What the cooperative needs, rather than what the applicant would like to do, should guide the hiring process.
If a board lacks confidence that it can do a good job of finding the right person for the job, it should get outside help. The best candidates for the job will expect a good , thorough interview process.
Erven and Bruynis suggested following these steps:
1. Determine the co-op’s labor and management needs; do a careful analysis to make sure the candidate will fit the needs of the entire organization. This will take a significant amount of the board’s time.
2. Develop a written, up-to-date job description.
3. Build a pool of candidates – the more the better. If you can’t develop a pool, stop the process until you can. Internal applications should be allowed unless a formal decision is made not to. But it is advisable not to discriminate against your own employees.
4. Review the applications and select those you wish
to interview.5. Conduct the interviews. But first decide who will be on the interview team, whether it will be a formal or informal interview, what questions will be asked, how evaluations will be recorded and where the interview will be conducted.
6. Check references.
7. Make a selection.
8. Hire selected applicant.
Volunteers from the audience participated in mock interviews to demonstrate effective interview techniques. These include: asking questions that cannot be answered with a yes or no; encouraging applicants to talk about themselves and covering a variety of topics, including some "what if" situations.
"You want to determine how candidates bring their own knowledge into play, perhaps eventually leading to a situation where they must admit they don't know the answer. You are not so much looking for right answers to these questions, but to how the applicant will behave when faced with a tough situation," Erven said. "Will the person get angry if he or she feels trapped?"
Ask only questions that are job related and will give insight into a candidate's ability to perform the job. It is best to have four or even five board members participate in the interview, and they should practice doing interviews before the real ones are held. Do not use the previous CEO to help interview. Also encourage the applicant to ask questions.
Your new leader should be able to inspire efforts of others through his leadership style, Bruynis said.
Clear sense of vision & mission critical to co-ops facing mergers
“Without a clear vision, mission, set of values and defined ways to measure success, a cooperative’s communications efforts are an unnecessary investment,” said Maury Miller, recently retired vice president of member services at CHS Cooperatives (Cenex Harvest States).
This philosophy helped guide the communications efforts of the co-op during the past 25 years as it grew and diversified through a series of mergers, Miller said., including a major unification of CENEX and Harvest States Cooperatives in 1998. That historic merger came together more quicky than many that had preceded it, in large part because of the excellent buy- in that existed among both organizations regarding their new mission.
CENEX and Land O’ Lakes formed a joint venture in 1987 to market their farm supply products, including an agronomy operation of which each owned 50 percent. Just 10 years later, the joint profitability of the two cooperatives was more than $200 million, and the joint venture is widely considered as a model of success. Mergers such as this create “overwhelming communications challenges” needed to blend differing “corporate” cultures, Miller noted.
Consolidations, Miller said, are not so much exercises in economics as in human relations, which makes communications critical to the success of the effort. In a merger, some will have to give up things they may hold dearly. Compromise becomes the order of the day in order to build a stronger, unified organization. “That’s not an easy thing to do when dealing with directors and managers who are highly driven and have strong views of what they want to do,” Miller said.
Effective communications requires clear understanding of the co-op’s:
1. Vision—what does the co-op want to be? In the Maury Miller consolidations “overwhelming communications challenges.”
case of CHS, the vision was to build “an integrated ag
supply and grain-based foods system.”2. Mission—what is the co-op’s purpose? For CHS, it was “improving the cooperative’s and producers’ profitability and value.”
3. Values—What core values will guide the way in which the co-op does business? Integrity/honesty, professionalism, quality of goods and services and respect for all were the key values CHS chose.
4. Measurements of success—growth, financial and customer success were the performance yardstick CHS selected.
The bottom line for every decision the CHS board makes is, “Did we help our farmers succeed by this action?” Miller said, “If not, we didn’t do so well. Helping producers and local co-ops succeed and serving local communities are why CHS exists, he said.
Miller stressed than an informed member is a more loyal member, and that about the last thing CHS would ever do is eliminate its member magazine (“Partners”), its primary tool for communicating with 350,000 producer-members. While Miller said he foresees a big role for the Internet in cooperative communications programs, he stressed that “it is not even close” to being a replacement for print communications with members.
Miller said he feels the farm media will usually try to help you tell your story if you are open and honest with them. Most communications, he added, should be framed for readers who will be thinking: “how does this impact me.”
CHS has maintained a strong communications program in large part, Miller said, because it staffs the office with communications professionals, and does not use it as “a dumping ground for people who can’t do real jobs.”
