Large cooperatives unifying

Editor's note: This- article stems from forthcoming RBS Research Report 174, "Cooperative Unification: Highlights From 1989 to Early 1999", in which highlights of unification activities, most of them among well-known cooperatives, are described. That report is an offshoot of RBS Service Report 57, Cooperative Restructuring, 1989-1998.

Unifications - mergers, consolidations and acquisitions. What does the future hold? In the September/October 1998 issue of Rural Cooperatives, Catherine Merlo provided an overview of recent cooperative merger activity (When Cooperatives Combine, pp. 18-23), pointing out the big deals completed, the benefits, doubts and sticky points of merging. Her article also discussed the merger aftermath and potential for more mergers.
This article adds to that discussion by recognizing the broad extent of the unification activity during the past 10 years, conceptualizing unification as a component of strategic planning. It also raises questions to consider in the future as the true implications of large-scale unifications manifest themselves.

        To provide a rough estimate of cooperative unification activity, figure 1 graphs activities derived from removals from USDA's cooperative mailing list from 1989 to 1997 (each year, farmer cooperatives are dropped from the mailing list because of mergers, consolidations, acquisitions, dissolutions, etc.). The unifications are those cooperatives that indicated they merged or consolidated, or were acquired by another cooperative. The trend of these statistics shows the peak year of activity is 1991, with 135 unifications. Other high years were 1992 (107) and 1995 (90). Low years for co-op unification were 1997 (57), 1994 (61), and 1992 (68).
        From 1989 through 1997, USDA Rural Development documented a total of 777 unifications. Of those, 65.8 percent were identified as mergers and consolidations, and 34.2 percent were acquisitions. These unifications included cooperatives of all sizes, although many of them were local or smaller cooperatives.
        RBS Research Report 174 describes 51 selected unifications that took place from January 1989 through early 1999. While selection for this study was arbitrary, the unifications were sorted according to cooperative size or perceived market impact. Unifications were categorized by type of cooperative or activity performed. As a result, 20 unifications were labeled as "dairy," nine as "farm supply," eight as "livestock" and seven as "fruit and vegetable." Four cooperative unifications were labeled "grain" and three involved "finance" (CoBank and its counterparts),. The top years for unification activity among this sample were 1995 and 1998, with nine occurring each year.
        Cooperative unification activity occurred in a broad and scattered pattern across the United States, most of it in California, Washington State, the Midwest, the Mid-South and parts of the East.
        Looking over the past 10 years and even further back - it is clear that cooperatives have been making unification choices for some time. However, recent unifications have involved larger cooperatives and expanded the presence of nationwide cooperatives with broad expanses of membership.
        A strategic planning direction Unification is a direction often chosen in response to dynamic trends and industry conditions, and the inherent need for cooperatives to realize member goals. Such conditions often pressure organizations to change or consider change (figure 2).
        In strategic planning, cooperatives respond to trends affecting their operations and service to members by assessing alternative strategic directions that will allow them to continue to accomplish organizational and system-wide goals. Figure 3 shows cooperatives have three directional choices. They can: 1) make internal changes to improve structure, efficiencies and operations; 2) unify with other cooperatives or companies; or 3) develop marketing agreements, joint ventures, strategic alliances or other working business relationships with other organizations.
        Unification, often conducted to achieve stronger industry position, also provides cooperatives with opportunities to use new strategies. Figure 4 illustrates cooperative strategic positioning and potential growth channels that often result from unification. Flowing from unification are a variety of probable strategies that come into play. Unification develops a strategic position that will often propel the surviving entity into one or more potential strategy channels of. vertical integration, horizontal integration, scale economies, capacity expansion, synergies and efficiencies.
       Unification can create a surviving cooperative that: 1) participates in two or more vertically adjacent industries (vertical integration); 2) expands an existing line of business and amassing resources or bargaining power to share market risks by accumulating volume required to realize scale economies in product procurement, sales, transportation and distribution (horizontal integration and scale economies); 3) substantially increases assets and operational base resulting in greater capacity and improved use of resources (capacity expansion); or 4) collapses specific facets of operations into more efficiently managed and operated central functions (synergies, efficiencies).
        Examples of such strategies during amalgamations are prevalent. For instance, the numerous mergers involving Mid-America Dairymen led to the formation of Dairy Farmers of America and brought about horizontal integration, economies of size/scale, vertical integration involving value-added products, and more efficient use of capacity. Those, in turn, created significant growth for the cooperatives involved and formed a cooperative of significant size and scope.
        In today's business environment, growth is one of the critical goals of unification for cooperatives. Economies of size, greater market prominence and membership enhancement are all growth factors that cooperatives strive to achieve. Vilstrup, Cobla and Ingalsbe (Cooperatives in Agriculture, Chapter 20, Prentice-Hall, 1989) contend that growth is considered a sign of a healthy, successful business, pointing out that advantages to growth are associated with economies of size and the ability to achieve marketing and bargaining power, political power, legislative influence ,and financial strength.

        So, growth through unification has been prevalent, intriguing and is altering traditional agricultural markets. Now, what does it mean? Why are some cooperatives making the choice? These are worth contemplating since experience and evidence indicate that unification is often the hardest choice for cooperatives to make and then pursue. Unification alters cooperative culture, internal and external structure, governance, asset base, membership boundaries and more. It also often involves a drastic change in operations and overall organizational and governance structure.
        With the kinds of growth the cooperative movement has seen lately - the development of large regional cooperative organizations - it's worth raising some questions. Let's start with member governance and service:
        How large can cooperatives become on a nationwide basis and still be effective organizations well represented and well governed by member owners? Will producer members be better served, or will the dilution of joined cooperative cultures and the resulting broad governing bodies, water down the level of member-owner control?
        In other words, will cultures be diluted as cooperatives grow into larger and more widespread organizations, crossing broad geographic boundaries? Will the transformed cooperatives have less member representation and governance? And, will those mega-cooperatives be stronger and better able to serve members?
        The ongoing and fast structural change in agricultural industries clouds the answers to these questions. Clearly, some agricultural markets need to be consolidated for higher member benefits. Some are fragmented by too many competing organizations given the limited producers and resources involved.
        Some often contend that overcoming fragmentation can be a significant strategic opportunity, and that once barriers to consolidation are overcome, the structure of an industry can be improved for those that consolidate. The structures of agricultural industries in dairy, farm supply and cattle, for instance, are changing due to consolidation. The artificial insemination industry has seen considerable consolidation. Once an industry with a large number of stud operations, it has now consolidated into four cooperatives and a select number of private firms. The dairy industry, overall, continues to consolidate. Though fragmentation in that industry still applies in certain areas, Dairy Farmers of America and Land O'Lakes, for instance, continue to gain large- scale prominence. The number of players in the industry has shrunk.
        Consolidations in the farm supply industry also are prevalent, including: Land O'Lakes and Countrymark, Cenex and Harvest States, and the prospect of Farmland and Cenex Harvest States.
        The changing structure of certain industries cannot be ignored. However, overcoming fragmentation and seeing industries consolidate, perhaps toward the "rule of three" (which asserts that there is only room for two or three major competitors in an industry sector-the companies that can supply the volume and service needed to support demand), invites more questions.
        How effective is unification for industries and its participants? Will they improve along with member services of the remaining cooperatives? How will large-scale unifications affect other cooperatives (local and regional) in the industry or related industries?
        The structural changes taking place will pressure existing cooperatives with comparatively slight industry involvement or market share. It may force them to consider unification or other action. The impact of such pressure must be carefully weighed. Continuing to serve producer-members in the most efficient and beneficial way, given changing structures, should be the ultimate goal of remaining cooperatives.
        So, cooperatives must assess the implications of unification on their market position and revenue-driven business practices as well as on service.
      Figure 5 summarizes the potential impacts and implications of unification. Given significant change via unification, there are a number of unknowns to contemplate. What will be the impact on: 1) member service and governance, 2) other cooperatives and firms, 3) industry and industry performance, and 4) subsequent strategy employment and organizational/operational change? Cooperative leaders must keep attuned to unifications affecting their cooperative and their industry and what impact these structural changes have on the organizations and services to members.
        Unifications among co-ops are expected to continue, and to further alter the structure and scope of agricultural industries. Questions as to the effectiveness of further consolidation arise. The answers won't be easy to assess, but time and a keen eye on the impacts of such unification activity will eventually produce a clearer picture. Research and/or analyses beyond merely describing unification activities are needed to gain a greater understanding of how unification is impacting industries and of its effect on cooperative cultures and operations.

        The boards of directors of Farmland Industries, Inc., Kansas City, Mo., and Cenex Harvest States Cooperative, St. Paul, Minn., have voted to combine operations, effective March 1, 2000. The new organization would be called United Country Brands and have projected sales of nearly $20 billion. The boards met Sept. 22 to sign final unification documents. Informational meetings in 37 cities will follow in October and November. The members of both cooperatives will vote Nov. 23 on the consolidation.
        Both organizations have complimentary businesses and overlapping memberships. The consolidation would increase opportunities to add value to the grain and livestock raised by producers. A desire to be a stronger player in a fast-paced and changing global agricultural food system coupled with accelerated concentration brought on by the industrialization of U.S. agriculture is triggering the union, officials report.
        Not lost on the participants are the opportunities to achieve substantial operational savings and to open windows to expanding markets. An expected $500 million in consolidation savings during its first six years will be offset somewhat by the expense of forming United Country Brands. A segmented base-capital plan that provides members with proportional investment in the businesses they use will become effective Sept. 1, 2000.
        Leadership slots for the proposed new cooperative have been designated by an interim board. Bob Honse, Farmland's chief operating officer, would be the initial chief executive officer through Dec. 31, 2003. John Johnson, president of Cenex Harvest States, would be president of United Country Brands until Dec. 31, 2004, then take over as CEO. Current CEOs H.D. "Harry" Cleberg of Farmland and Noel Estenson of Cenex Harvest States will become advisors to the new cooperative until their planned retirements on Dec. 31, 2000.
        During a transition period through Dec. 31, 2001, Elroy Webster, Cenex Harvest States chairman, will head the 34-member interim board (17 from each cooperative). Al Shively, current Farmland chairman, will become the new vice chairman. After that, a 25-member board would be elected, consisting of 18 producers and seven local cooperative managers.
        What could be the last separate annual meetings of the two cooperatives will be held Dec. 2-3 (Cenex Harvest States) and Dec. 7-8 (Farmland). Although United Country Brands' office of leadership would be based in Kansas City, where Farmland is building a new headquarters,, the new cooperative would maintain a significant employee presence at Inver Grove Heights, Minn. Should the merger be approved, employee relocation should be minimal. The total number of employees in each city would remain about the same, officials report. Grain and energy interests would be based at Inver Grove Heights, while refrigerated foods and livestock would be centered at Kansas City.
        The proposed new cooperative would not impact the joint agronomy venture started more than 12 years ago by Cenex and Land O'Lakes, Inc. that venture-continued after the merger of Cenex with Harvest States-will carry forward, officials report. United Country Brands will share half ownership with Land O'Lakes, and business will be conducted in both Kansas City and Inver Grove Heights.
        Both Cenex Harvest States and Land O'Lakes also have a 55 percent interest in CF Industries, Inc., an inter-regional manufacturer and distributor of fertilizers.

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