1031859 rur coop-sept/oct 02 - usda rural development · 2019. 11. 20. · rural cooperatives /...

COOPERATIVESRural

COOPERATIVESUSDA / Rural Development September/October 2002

C o o p e r a t i v e s :t h e f a b r i c o f A m e r i c aC o o p e r a t i v e s :t h e f a b r i c o f A m e r i c a

USDA / Rural Development September/October 2002

2 September/October 2002 / Rural Cooperatives

As member-driven businesses, coop-eratives are constantly required to assessmembers’ needs and to stay in tune withthose needs. This requirement is also afundamental step in organizing newcooperative business ventures. A lot oftime and effort goes into identifying themutual needs of prospective membersand in determining activities that thecooperative will engage in to meetthose needs. This provides a ratio-nale for members to invest in thenew venture.

The needs assessment is also animportant—albeit more complicat-ed—step for established coopera-tives. Is there sufficient volume ofpurchases or marketing to justifycontinued use of assets at differentlocations? Are there new businessservices required that provide anopportunity for expansion into newareas, or to extend processing of rawcommodities into more profitable usesthat can return additional income tomembers?

This constant evaluation of memberneeds and the cooperative’s ability torespond to them is a fundamentalstrength of cooperative enterprise.What other business is better able todetermine those needs than a user-owned business?

Needs assessment is more compli-cated for established local and regionalcooperatives due to the increasingdiversity in the size of members’ opera-tions and the wide range of needsamong different segments of the mem-bership. A homogenous membership,with similar needs and sizes of opera-tions, has generally been regarded as anunderlying key to cooperative success.

With a diverse membership, cooper-

ative management and boards of direc-tors must work harder to identify mar-ket segments that can be profitablyserved while still maintaining the com-mon interest of the entire membership.

For instance, farm supply productsand delivery needed by large commer-cial farmers differ significantly from

those for small and part-time farmers.Similarly, the marketing needs of eachsegment of membership can differmarkedly.

Cultural similarities among mem-bers and their community of interestcan also be a determining factor foreffective collective action. Such factorsas national origins, religious beliefs,ethnicity and work ethics are eachmanifested in one way or another inthe makeup of cooperatives in theUnited States and internationally.

Challenges posed by diverse mem-berships should be met and turnedinto strengths. Cooperatives areinherently positioned to be more sen-sitive to varying needs because theyare focused on the business of servingthose needs. Nothing in size, locationor membership makeup detracts fromthat central purpose.

In addition, cooperatives have

demonstrated far more ability to adaptthan they have been credited for.Forthright, well thought-out respons-es to rapid and important changes inAmerican agriculture—and society asa whole—will make farmer coopera-tion an ongoing, effective way forfarmers to participate in the control,

benefits and the contributions ofagriculture.

Good examples of assessingmember needs and business linesthat can effectively meet thoseneeds are found in the articles inthis issue about local coopera-tives in western Iowa, and theevolving cooperative marketingefforts of small minority farmersin north Florida and adjoiningstates. Each mirrors culturalattributes of producers in the

communities involved, and the tastes,preferences and marketing require-ments for serving various segments ofthe marketplace.

Another excellent contribution tothis dialogue is also found in the Man-agement Tip article, about standardsrequired of cooperative directors tomeet their responsibilities as stewardsof members’ interests and in oversee-ing operations of cooperatives.

As Cooperative Month is celebratedthroughout the country in October, weare reminded of the significant roleplayed by cooperatives in communitiesthroughout rural America and the con-tinuing opportunity for needs of farm-ers and rural residents to be metthrough effective forms of group action.

Randall E. Torgerson, Deputy Administrator,USDA Rural Business-Cooperative Service

C O M M E N T A R Y

Attention to member, market needs is key to cooperative success

Cultural similaritiesamong members andtheir community of interest can also be a

determining factor foreffective collective action.

Rural Cooperatives / September/October 2002 3

Rural COOPERATIVES (1088-8845) is publishedbimonthly by Rural Business–Cooperative Service,U.S. Department of Agriculture, 1400 IndependenceAve. SW, Stop 0705, Washington, DC. 20250-0705.The Secretary of Agriculture has determined thatpublication of this periodical is necessary in thetransaction of public business required by law of the Department. Periodicals postage paid atWashington, DC. and additional mailing offices.Copies may be obtained from the Superintendent ofDocuments, Government Printing Office, Washington,DC, 20402, at $21 per year. Postmaster: send addresschange to: Rural Cooperatives, USDA/RBS, Stop3255, Wash., DC 20250-3255.

Mention in Rural COOPERATIVES of company andbrand names does not signify endorsement overother companies’ products and services.

Unless otherwise stated, contents of this publicationare not copyrighted and may be reprinted freely. Fornoncopyrighted articles, mention of source will beappreciated but is not required.

The United States Department of Agriculture (USDA)prohibits discrimination in all its programs and activities on the basis of race, color, national origin,sex, religion, age, disability, political beliefs, sexualorientation, and marital or family status. (Not all prohibited bases apply to all programs). Persons with disabilities who require alternative means forcommunication of program information (braille, largeprint, audiotape, etc.) should contact USDA’s TARGETCenter at (202) 720-2600 (voice and TDD).

To file a complaint of discrimination, write USDA,Director, Office of Civil Rights, Room 326-W, WhittenBuilding, 14th and Independence Avenue, SW,Washington, D.C. 20250-9410, or call (202) 720-5964(voice or TDD). USDA is an equal opportunityprovider and employer.

Ann Veneman, Secretary of Agriculture

Thomas C. Dorr, Under Secretary, USDA RuralDevelopment

John Rosso, Administrator, Rural Business-Cooperative Service

Randall Torgerson, Deputy Administrator, USDARural Business-Cooperative Service

Dan Campbell, Editor

Vision 2000/KOTA, Design

Have a cooperative-related question?Call (202) 720-6483, orFax (202) 720-4641, Information Director,

This publication was printed with vegetable oil-based ink.

United States Department of Agriculture

COOPERATIVESRural

COOPERATIVESSeptember/October 2002 Volume 69 Number 5

O n t h e C o v e r :

October is National Cooperative Month, a time to recognize thenation’s 48,000 cooperatives and their 120 million members. Thismagazine regularly features farmer, fishery, craft and utility coopera-tives, but co-ops also provide Americans with housing, health care,groceries, hardware and banking services. To learn more about howyour cooperative can promote National Cooperative Month, visit:www.coopmonth.coop . USDA Graphic by Steve Thompson

F E A T U R E S

4 High SocietySioux Center Farmers Co-op Society ties future to NW Iowalivestock industryBy Dan Campbell

6 The Right Stuff: Ag-based, but diverse economyhelps Sioux County thriveBy Dan Campbell

8 Co-op’s grain marketer strives to reduce producer risk

10 Midwest Farmers Co-op members benefittingfrom new rail terminal

18 Taking it to the next levelSuccess of small Florida vegetable co-op leads to a network ofsimilar cooperativesBy Glyen Holmes, Vonda Richardson, Dan Schofer

24 Legg sees vital role for utility co-ops in ruralAmerica’s futureBy Steve Thompson

26 Still raising caneGeorge Wedgworth is a 40-year veteran of Florida’s sugar wars

D E P A R T M E N T S2 COMMENTARY

15 MANAGEMENT TIP29 NEWSLINE


High Soc ie tySioux Center Farmers Co-op Societyties future to NW Iowa livestock industry

By Dan Campbell, [email protected]

ioux County, Iowa, is a fertile, wall-to-wall sea of corn and soybeans. It’s hard to

imagine that with all those bountiful acres—which produce nearly 30 million

bushels of corn and 9 million bushels of soybeans annually—the county would

need to import grain from surrounding counties to help fuel its livestock industry. Yet, as

Iowa’s No. 1 county for both hogs and cattle (and also high in the ranks for poultry pro-

duction), Sioux County must go outside its own borders to find enough corn to feed all

those hungry snouts and muzzles.

According to USDA statistics, Sioux County sold nearly 1.6 million hogs and pigs in

1997, up from 873,000 in 1987. It also sold 243,000 beef cattle and calves in 1997 and 2.4

million broilers. All livestock sectors in the county will likely show strong growth since ‘97,

when USDA completes its 2002

agricultural census.

S

Corn is loaded onto a conveyor belt that feeds the new ethanol plant atSioux Center.

It comes as little surprise, then, that theprimary strategic direction of the SiouxCenter Farmers Cooperative Society hasbeen to aggressively pursue the livestockfeed market, with the goal of being theregion’s major producer and supplier offeed. In the process, it has taken a leadingrole in the effort to modernize the area’shog-production facilities.

This effort has received both praise andsome criticism, since many of the new hog-production facilities have switched over tocontract growing. Yet few will debate that theco-op’s efforts have fueled growth in SiouxCounty’s hog industry at a time when Iowa’shog production has remained relatively stag-nant. Statewide, hog numbers the past 5 yearshave been holding fairly steady, in the rangeof 15 million to 15.5 million head.

‘Progressively conservative’ co-op Like the town of Sioux Center, this co-op

has remained profitable and growing at atime when a number of similar co-ops arestruggling. Sioux Center Farmers Coopera-tive Society is projecting sales of about $130million this year, says co-op Manger KenEhrp. During the past 11 years, the co-op

has averaged about $1.7 million in localearnings every year. “Currently, we have $8million in working capital, which is virtuallyunheard for a company of our size,” he says.

Roger Kempers, co-op president, says thephilosophy of the co-op and its members is“progressively conservative. We are alwayslooking for new opportunities that can bepursued without taking on undue risk.”

The cooperative is owned by 2,750 pro-ducers, about 500 of whom joined in March2002 as the result of a merger with Sioux-land Cooperative, based in Sanborn. Thatmerger increased the number of elevators inthe co-op’s local network to nine, andincreased storage capacity from 9 million to19 million bushels.

Member equity is being revolved back toowners in just 10 years. “Whether we canmaintain that 10-year period is question-able,” Ehrp says. “We’re coming up to somebig (redemption) years, and will likely slip abit. We pay 30 percent cash each year forpatronage.”

The success of the co-op and the town ofSioux Center go hand-in-hand, Ehrp says.“This is a wonderful place to live and a won-derful place to do business.”


Inset photos, from the left:Flanked by the Sioux

Center “skyline,” FarmersCo-op Society Manager KenEhrp (right) reviews opera-tions with board presidentRoger Kempers (center) anddirector Marv Wynia.

Mechanics in the co-op’sshop keep the fleet of mod-ern agronomy gear in topcondition.

Despite low grain andlivestock prices, farmerHarlan Klassen (right) sayshe “feels blessed” to be ableto farm with all four of hisgrown sons, includingDarwin (center) and Dan.

The Farmers Co-opSociety operates its ownfeedlot at Sioux Center. USDA Photos by Dan Campbell

In addition to grain marketing (seesidebar, page 8), the co-op has a smallgalaxy of other businesses scatteredabout Sioux County. Across the parkinglot from the Sioux Center elevatorcomplex is the co–op’s agronomy officeand a fleet of modern, satellite-guidedapplicators. There’s also a large repairshop where, on this day, two Terra-Gator applicator rigs are being tunedup. Also nearby is the co-op-owned

hardware store, which is brimming withhome appliances, paints, tools, lawnmowers and more.

The co-op has operated a lumberyardin Sioux Center since the late 1970s,when about 100 new homes were beingbuilt each year around town. Construc-tion has currently slowed to 15-20 newhomes per year, and Ehrp says it’sbecoming more of a challenge to main-tain profits from the lumberyard.

Scattered throughout the SiouxCounty region are thousands of mod-ern hog barns, which Farmers Co-opSociety not only supplies with feed, butwhich it also helps to build and financefor members.

A few miles outside of town is theco-op’s 12,000-head cattle confinementfeedlot, which usually operates at fullcapacity. Members own the cattle, butthe co-op charges for feed and its deliv-

By Dan Campbell, Editor

Something right is going on in Sioux County, Iowa.While many rural Midwest communities are sliding intooblivion as their stores close and their schools andchurches migrate away with their young people, thisnorthwest Iowa county’s two largest towns—Sioux Cen-ter and Orange City—have growing populations and areadding new businesses and services.

Signs of progress abound in Sioux Center, population6,500. It is home to a fully developed, 120-acre industrialpark, the new 100,000-square-foot Centre Mall andexcellent public and private schools and a 4-year col-lege. It even has a problem many rural towns would loveto share: a tight housing market.

The most visible manifestation of its thriving businesssector is a $15-million Pella window assembly plant,which opened about 2 years ago on the northern edge oftown. The plant employs about 500 workers. It has been aboon not only to Sioux Center, but the entire region, withworkers commuting from 90 different zip codes.

Among other ag-related employers here is SiouxAutomation, which builds livestock feed wagons andother farm equipment, Sioux Preme Pack hog process-ing and Trans Ova Genetics, which performs beef anddairy cattle embryo transfers either in its clinic or onfarms anywhere in the nation.

The town’s ability to attract new businesses boilsdown to its people, a favorable business environmentand amenities that offer a high quality of life, says May-or Dale Den Herder, a fourth generation resident. HisDutch ancestors first homesteaded here in 1872, living ina sod hut even before Sioux Center was founded in 1891.He, like others, attributes much of Sioux Center’s suc-cess to an old-fashioned work ethic, a willingness to trynew things, nurturing families and a deep spiritual faiththat, together, forge a strong sense of community.

Between 1990 and 2000, Sioux Center’s populationrose 18 percent. “That bucks the trend you will see inmost rural areas,” Den Herder notes. Jobs, of course,are the key to a stable or growing population. Thirtyyears ago the city had only 100 manufacturing jobs.Today, it has more than 2,300.

He also has high praise forthe Farmers Co-op Society,not only for being “a strongfriend of farmers that hashelped to modernize theregion’s livestock industry, butfor also being a leader in pro-moting our community.”

Den Herder is also the pres-ident of American State Bank,which has a $250 million loanportfolio that reflects the diversification occurring in theeconomy here. A decade or so ago, ag accounted forabout 70 percent of those loans, but that has since dippedto about 40 percent.

While Sioux Center, Orange City and some other areatowns are thriving, some other rural towns in the regionare struggling just to hold even, and others are seeingtheir vitality slowly slip away.

“You don’t have to travel too far to find a lot of hurtgoing on,” says Den Herder. “We could be looked uponas something of an island of prosperity.”

Motivated workforceThe biggest factor in feeding that prosperity is a

“motivated, educated workforce—people who takepride in what they do,” says Paul Clousing, assistant citymanager and director of the Sioux Center EconomicDevelopment Corporation. The available labor pool islarger than is readily apparent from the rural landscape.While there are no large cities—Sioux Center is the

The right stuff: Ag-based, but diverse economy helps Sioux County thrive


ery. The co-op also offers brokerageservice to sell cattle for members andeven offers them financing at the feed-lot. It has about $8.5 million currentlyloaned out to cattle producers.

“They pay $150 per head up front,and we loan them the balance,” Ehrpsays. “When the cattle are sold, ourname is the only one on the check fromthe processor. We take out our moneyfor feed, and the producer gets the bal-

ance—so we’re always assured of gettingpaid.” The primary cattle market is thepacking plant in Sioux City, Iowa.

“It’s very tough to make money oncattle these days,” Ehrp says while dri-ving past pens filled with fat steers nos-ing in the feed troughs. “Feeder costsare just too high compared to whatthey earn when they sell. You buy feed-er cattle and hope prices (for fed cattle)go up so you can lock in a profit.”

Near the cattle feedlot is a newethanol plant, operated by a sister co-op—Siouxland Energy and Livestock—which Sioux Center Co-op Societyhelped launch. The 14-million-gallonethanol plant had initial start-up difficul-ties with equipment, but plant managerBernie Punt says most of those problemshave been resolved, and the ethanolplant is now operating at about 85 per-cent capacity. It will consume about 5.3

largest city in a six-county region—there are more peo-ple tucked away in all those little towns and farms thanone might think. About 100,000 people live within a 30-mile radius of the Sioux Center, Clousing notes.

“Bio technology is the newest wrinkle here,” Clous-ing says, adding that the town now has three or four bio-tech businesses that employ about 200 workers.

Sioux Pharm Inc. is a bio-tech firm that extractschondroitin sulfate from bovine tracheas, then purifiesthe product into pills, called Chondropure, which bringsrelief to arthritis sufferers. Dr. Allan Kramer, the compa-

ny president, says Sioux Pharm is the nation’s largestproducer of this medicine.

He employs 25 workers, and says a business ownerwould be hard pressed to find a better labor pool than innorthwest Iowa. He also gives Sioux Center strongmarks for its “pro-business” orientation and its goodhighway and rail system. The state of Iowa was helpfulto him in providing grants for value-added businessdevelopment, Kramer says, and the local livestockindustry naturally makes for a good source of raw prod-uct for the company.

A thriving collegeDordt College, a 1,400-student college affiliated with

the Christian Reformed Church, attracts students from36 states, six Canadian provinces and nine foreign coun-tries. The most recent addition to the campus is a $12.5million Campus Center building, slated to open thismonth, that will house student services offices, the busi-ness department, a bowling alley and a snack bar.

The college boasts two new dormitories and a fairlynew recreation center, which features an indoor track.It also operates a research farm where students can gethands-on experience in crop and livestock science.

Sioux Center’s motto, “progress through coopera-tion,” is certainly true of the relationship of the town andcollege, says Clousing. The college, local schools andtown have joined forces to put up much of the $9.1 mil-lion needed to replace the city’s aging community swim-ming pool with a state-of-the-art pool complex, calledthe All-Seasons Center. The state of Iowa and localphone company also contributed needed funds.

The pool complex will feature both indoor and out-door pools, including a “plunge pool” with tall slides,an “aquatic family fun park” with other water amuse-ments and a six-lane lap pool. The development willalso include an ice rink that will become the home ofthe Dordt College hockey team, the Blades. It is thetype of recreational facility rarely found in a town ofthis size, and one which boosts the quality of life that


Clockwise from the top: Work nears completion on the

new student center at DordtCollege in Sioux Center.

At Med Tec in Orange City,Bryan Kooi examines a mask usedto stabilize the head of a patientreceiving radiation treatment.

The new Theater Arts Centerrises on the campus of NorthwestCollege in Orange City.

Windows, such as the onedisplayed here by DaleZevenbergen, are built andshipped within 7 days of orderfrom the Pella window plant inSioux Center. USDA photos by Dan Campbell

continued on page 32


million bushels of corn annually. A closed, new-generation co-op,

Siouxland Energy has 410 members,each of whom were required to pur-

chase a minimum of two equity shares.Each equity share gives a member deliv-ery rights to 2,500 bushels of corn. Totalcost of the plant was about $18.5 mil-

lion. Sioux Center Co-op Societyis also a member and a major sup-plier of corn to the plant.

Feed mill retrofit increases efficiency

In support of the goal of beingthe primary feed supplier for theregion’s livestock industry, theFarmers Co-op Society 3 years agospent $3.5 million to retrofit itsfeed mill. On any given day, SiouxCenter moves 1,200 tons of feed.With $35 million in sales annually,feed is by far Sioux Center’s largestfarm supply sale item. By compari-

son, agronomy brings in $13 million andlumber $4 million.

Over a 12-month period, the co-ophandles about 20 million bushels ofcorn and 7 million bushels of soybeans.It can load 54 railcars at a time on theBurlington Northern Railway

Farmers Co-op Society has main-tained its high level of profitabilitythrough years of major investments onassets—including expanding grain stor-age, the feed mill retrofit, and greatlyexpanding its fleet of trucks and appli-cators. “We’ve spent a lot of money, butwe’ve made a lot of money,” Ehrp says.“We are currently about 84 percent(debt-to-equity) leveraged, which isabout as high as we want to get.” Thedebt ratio rose as a result of majorexpenditures on growth and renovation

The phone rings, and John Hansen answers it whileleafing through pages of grain market data on his desk.More grain numbers flicker on his computer monitor.Grain prices have been gyrating more than normal latelybecause of heat and drought inmany states, creating whatHansen calls “a weather scare.”

“Hello John, is this a good timeto sell?” asks the farmer on theother end. Minutes later, it ringsagain, but this time the farmercalling is seeking advice on whento buy grain for his hogs. Nosooner does that conversationend than it rings again, andHansen is working out the detailsfor shipping dairy cattle feed fromhis employer—the Sioux CenterFarmers Cooperative Society—allthe way to Alaska, a trip whichinvolves transport by hydro-train (putting railcars onships in Seattle).

Tucked away though he may be in a small, clutteredoffice in northwest Iowa, Hansen sees the world ofgrain through his computer.

“I watch the market all day, and I study it,” Hansensays. “I not only track grain on a cash basis, but thefutures market as well. I try to put it all together andpresent it in a systematic way that the producer canunderstand.”

Yes, it is complicated, he admits. “But the secret is itthat doesn’t have to be as complicated as some make itout to be.” His modus operandi: study the market, followthe trends and patterns, then make an informed decision.

So how is the grain marketlooking, John?

“Depends,” he says with agood-natured smile. “Are youbuying or selling? We do a lot ofboth here, so it’s all a matter ofperspective.” A spike in cornprices will bring joy to the heart ofa grain farmer who is selling, butfor a hog producer who is buyingfeed, it naturally has the oppositeeffect.

Most local grain co-ops do farmore selling than buying, butSioux Center does both in near-equal measure. The co-op also

does pooled marketing for members who so desire. “It takes a unique grain merchandiser to wear both

hats like that, and John does a phenomenal job for us,”says his boss, co-op Manager Ken Ehrp, who himselfearns plaudits from his directors for helping the co-opthrive. “The producers trust John to give them goodadvice, and you can’t put a price tag on that.”

Hansen, a former grain merchandiser for ADM whohas been with the Sioux Center Co-op Society for 5years, says, “People think I like to see grain markets

Co-op’s grain marketer strives to reduce producer risk exposure

Customers get quality service and merchandise inthe co-op’s hardware and appliance store in SiouxCenter.

“I think all producers should take mandatoryclasses in grain marketing,” says John Hansen,grain manager for the Farmers Co-op Society inSioux Center.


of facilities. “Our goal is to get thatdown to the mid-to-low 60s. That givesus opportunity so that if we see some-thing come along that we want to writea check for, the bank will OK it.”

The co-op adheres to a very strictpolicy on accounts receivable, and hashad “a tremendously good record inthat area over the years,” Ehrp says.“We’re seeing that change a littlebecause of (low) livestock and grainprices, which will make accountsreceivable a challenge in the nearfuture.” He credits his board for hav-ing “great insight 15 years ago when itset a very strict credit policy, which Ihave enforced.” Some co-ops have atendency to get lax on their collec-tions, to the determent of the co-op,he notes.

Merger yields benefitsThe possibility of Sioux Center

merging with Siouxland first surfacedseveral years ago, Kempers says. “Atthat time there wasn’t sufficient inter-est. But at least we opened some com-munications channels that were stillthere when the opportunity came.”

As with any merger of cooperatives,it was a long process involving manyproducer meetings, most of them verywell attended. “Financial statementsshowing how we looked separately vs.how we looked together were reviewedvery carefully,” he says.

Marv Wynia, another director, saysoverall efficiency of both cooperativeshas been much improved by the merg-er. “Now we can share trucks, Terra-gators and other equipment and make

sure they are used more efficiently.” “We went from one rail line to

three, which gives us the opportunityto work for better bids. We also have awider area to draw corn from—andwith our feed business, we need a lot ofcorn,” says Kempers.

Many farmers own trucks withenough capacity to make it worthwhileto haul it further for a better price. “It’snothing for some farmers to haul theirgrain 30 or 40 miles to get a betterprice. So we’re pulling corn from quitea way now,” he adds.

Following the merger, Sioux Centersold its petroleum division to Co-opGas and Oil, the local fuel co-op inSioux Center. Membership among thetwo co-ops overlapped quite heavily,and Ehrp says his board decided the

high. No, I don’t. But I don’t like to see them low either. Ijust need to be able to trade. I am set up to trade andmake money by reducing my risk by hedging and tradingthe basis to make money off of it.”

Risk Management 101“I treat my job as a risk management service to our

producers,” says Hansen. “I strive to reduce their risk,not increase it. When markets go up, like this,” he says,gesturing toward his computer, “I work with my feedcustomers to help them cover their costs in the mosteconomical way.”

Too many farmers don’t want to sell grain beforethey harvest it, which is a mistake, he says. “You needto sit down and do some homework in advance of har-vest. Figure out your 10-year production average, thentake your worst and best years and throw them out.Come up with a good average. Then get a percentageof your crop to market on a favorable trend. If it’s goingup, market a percentage of your crop on it; if the marketis going down, you need to market a higher percentagebefore it drops even more. It’s an average-trend gamethat you play.”

But it’s a sad fact of farming life that 80 percent ofproducers sell their grain in the bottom half of the mar-ket, Hansen says. “My objective is to get them to sellmore on the right side of the market.”

Grain markets, he says, can be a bit like car with anengine in need of a tune-up. “They get of out of synch—they’re too high or too low for a few days—and youneed to take advantage of that. When they are too high,you need to get aggressive and sell into the market.

When they are too low, you need to step up and get thatgrain bought for your livestock.”

Marketing itself, Hansen says, is simple. “Gatheringthe information to make the right decision, that’s thehard part. It’s a lot like school work: you study a lot ofinformation, then get tested. My test scores come inonce a month, and I get graded on whether we lost ormade money.” In baseball terms, Hansen says it’s thosewho hit for consistent average who do best, not theguys who swing for the fence every time up. “Thosealways looking for home runs tend to lose in this game.”

Sioux Center’s grain customers include the multina-tionals—Cargill, ADM, Bungee, and others—andregional grain buyers, such as Schoular Grain in Omahaand Agri-Grain Marketing in Des Moines. “But mybiggest customers are local livestock people aroundhere; about 80 to 85 percent of our grain stays local.That’s the flip of most areas, where they probably shipout 85 percent of their grain.”

That ability to keep grain at home is Sioux County’sprimary value-added ag system, he says. “Those dollarskeeps turning over here.”

The biggest mistake grain farmers make? “Lack ofstudying the market,” Hansen says without even apause. “I think all producers should take mandatoryclasses in grain marketing. You must study to make abetter business decision, just like we have to do here.Don’t spend all your time on your tractor—study themarkets. Figure out a plan months ahead of harvest. Themind set of ‘I’m not going to sell until the banker tells meto’ is a poor way of marketing.” ■

—By Dan Campbell


competition was not beneficial. Notonly is the merged fuel co-op moreefficient, but the sale also reducedSioux Center’s long-term debt. “Thatgives us a chance to look for additionalopportunities out there and helps themgrow,” Ehrp says.

Was there concern that Sioux Cen-ter could be taking on any liabilities ofSiouxland?

“Even though the other co-op was

faced with some financial challenges, wecould see that its fixed assets were ingood shape and had been well taken careof,” Wynia says. “All of their elevatorswere in top shape. That was big part ofthe decision for us, and why we saw somuch potential from the merger.”

“We looked at it conservatively,”Kempers adds. “Ken (Ehrp) helped usassess the opportunity and how itwould fit financially into the total

scope of the company. That is one ofhis real strengths, showing you clearlyhow all the pieces fit together and howwe would look as one cooperative.”

Ehrp knows the board well enough,Kempers says, “that if he comes to uswith a recommendation, he has alreadyanticipated many of the questions heknows we will ask. It helps that he hasdone the needed research in advance.”

“If you have a manager who gives

Until recently, it wasn’t unusual to see 2-to-3 millionbushels of grain piled up on the ground around the Mid-west Farmers Cooperative railcar-loading terminal out-side Alton, Iowa. But in April 2001, the tarp covering 2million bushels of corn blew off in a storm, and then theskies opened up, dumping more than six inches of rain onthe exposed grain.

Co-op Manager Ellis “Skip” Hein still recalls thatnightmare vividly. “All you can do in a situation like that isship it as fast as you can,” he says. “We were fortunatethat we handle enough grain volume at this location thatwe could blend the quality to No. 2 corn. We dodged abullet, but it made us realize that we didn’t want to be putin that position again.”

So the 1.1-million bushel vertical elevator at the termi-nal, originally built in 1997-98, was expand-ed with an additional 4.1-million bushel,automated flat storage facility. The co-op’sboard agreed to invest $7.7 million for theoriginal terminal and $2.8 million for theexpansion, which were both completed ontime and under budget. “Start-up was vir-tually flawless, which amazed everyone fora facility of this size. It only required someminor tweaking,” Hein says.

Despite the mammoth size of the facili-ty, the loading operation is so automatedthat it can be operated by a single workeron the outside. The diesel locomotive thatpulls the hopper cars into place is operat-ed by remote control, eliminating the needfor at least one additional worker at theterminal. The terminal can load a 90-100car train (with each jumbo hopper carholding 4,000 bushels) in just 10-12 hours.The co-op loads 35-to-40 unit trains annu-ally, and trucks several million more

bushels each year to area grain processors, includingsoybeans sent to AGP and corn shipped through Mid-west’s feed-manufacturing operations.

Need for new terminal fuels co-op merger Midwest, with 9 branches and 13 locations, was

formed in 1997 when Sheldon Farmers Co-op merged itsthree locations withAlton-Orange CityCooperative’s fivelocations. The co-opexpanded again in1999 when Suther-land Farmers Coop-erative joined it.

Midwest Farmers Co-op members benefitting from new rail terminal

Clockwise from top: Up on the roof – Tony Jungers does a

rooftop inspection at the new MidwestFarmers Co-op rail terminal at Alton, Iowa.

Midwest Agronomy Manager Larry DenHartog and his crew are using this high-techapplicator bar to inject manure-fertilizer intothe soil.

Another load of corn is delivered toMidwest’s Alton rail terminal, under the eyeof Manager Skip Hein. USDA photos by Dan Campbell

the board the kind of information itneeds to make good decisions, it makesyour job as a director very enjoyable,and I have enjoyed my seven years onthis board,” Wynia adds. “I recom-mend board service to any co-op mem-ber asked to jump in and who is willingto work hard, make tough decisionsand not arrive with a personal agenda.”

An example of one of those toughdecisions, Wynia says, was when the

Sioux Center board decided to closedown its other lumberyard in the com-munity of Ireton a few years ago.

“I live close by, and while nobodyever tore into me, when I would gointo town people would ask why weclosed it and would say how disap-pointed they were,” Wynia recalls. “Itwas hard for some people because wetook away their lumberyard, and it nodoubt had benefitted people there. But

the operation just wasn’t profitable. Wehad to weigh that against keeping itopen strictly as a service to the commu-nity.” While keeping it open wouldhave been popular among the people inIreton, Wynia said it wouldn’t havebeen best for the co-op.

With co-op trucks going back andforth to Ireton daily, the co-op is stillable to make deliveries of lumber sup-plies from the Sioux Center store, Kem-


Today, Midwest has 2,300 class-A producer memberswithin its 70-mile long, 50-mile wide trade territory. Lastyear, it had $78 million in sales. In addition to its grainand farm supply businesses, the co-op also providesagronomy services, petroleum products, and operatesits own lumberyard, custom cattle feedlot and a dairyheifer replacement program. It also has an over-the-road trucking operation that hauls for Farmland Foods,Land O’ Lakes, Sara Lee and others.

Prior to the 1997 merger, the Sheldon and Alton-Orange City co-ops were “truck houses that only hadaccess to 25-railcar loadout terminals,” says Hein, as hewatches corn-laden trucks pull onto the scales of theAlton terminal, where a hydraulic sampling arm lowersinto each hopper brimming with Iowa gold. But 25-carterminals no longer cut it. “They just aren’t competitivein today’s business environment,” Hein says. The rail-ways say they can’t make a profit from short trains, “andit is the rail rates that are driving this type of expansion.”

The need for a larger rail-loading terminal was theprimary issue that drove the 1997 merger. “Neither co-op had the resources to build something like this on itsown, even though both were strong co-ops,” Hein says.“Together, however, we were able to combine re-sources and meet a crucial need.” Indeed, the co-opswere strong enough that they used working capital tofinance about 25 percent of the terminal, with a loanfrom CoBank providing the rest.

“Many times in mergers, you see one strong compa-ny absorb a weaker one, which can ultimately weakenthe stronger company. If companies recognize opportu-nities when both are strong, it works out much better,”says Hein, who has been with the co-op since 1997, pri-or to which he managed a multi-branch grain and farmsupply facility for Land O’ Lakes in Minnesota. Aftermergers, Hein says, co-ops should “make adjustmentsin operations as well as with the balance sheets andvaluation of assets so that the surviving companyremains strong.”

The new rail terminal gives co-op members much-improved access to a greater variety of markets, Hein

says, which means better prices. The co-op now has theoption of shipping to the Pacific Northwest or South-west livestock feeding markets, as well as the Gulf portsand Mexico. This has helped add 6 to 10 cents perbushel for members, he estimates. “So this facility isvery much adding value for our members, who also earnequity by doing business with their cooperative.”

Raising heifersAnother innovative way Midwest is providing service

to members with dairies is through a heifer-replacementprogram. The co-op takes calves at just a few days oldand raises them in “a strict bio-security environment,”where they remain for eight weeks. The calves are thenmoved to two other places for an additional 8 weeks.After that, they go to a heifer finisher, where they areraised to a mature weight. Midwest then returns theheifers to members’ farms. In less than 2 years, the busi-ness—owned by Midwest and its partners in a four-waylimited liability corporation—has grown to about 6,000cows and 4,100 calves.

Hein lives in Alton, less than a mile from the new ter-minal. Alton has seen some decline in its commercialsector over the past 20 years, but it is now taking impor-tant steps to encourage growth again, says Hein, who isa member of the city council and whose wife is thetown’s economic development director. There is a newcampground that just opened on the north edge of town,a new 43-acre industrial park, and a new 25-acre hous-ing development on the west end of town. Funds arealso being raised for a new library and museum.

Midwest Co-op’s board encourages all co-opemployees to be active in the civic life of their communi-ties. Co-op officers and staff are “active on fire and res-cue teams, chambers, churches, you name it,” saysHein. “Our philosophy is: if you are going to live in acommunity, be a part of it.” And since Midwest is oftenthe largest employer and tax payer in the communitieswhere it operates, it has a vested interest in seeing thetowns thrive, and vice versa.



pers notes, which has helped limit theinconvenience caused by the closure.

Wynia says it seems to be gettingharder to get people to run for theboard. “I think some may feel intimidat-ed by the growing size of the co-op. Wealways find good candidates, but it seemsto take more phone calls every year.”

Is the co-op done merging? “I think there will be further mergers

in the future,” Ehrp says. “This co-ophas the type of balance sheet andresources that others, over time, will say‘that’s a company we would like to dobusiness with and maybe be a part of.’Some of the other local co-ops arestretched a little thin. With a shortcrop, and margins becoming thin-ner while expenses go up, it meansturning a net profit is becomingquite an issue out here.”

Not only does he foresee moreco-op consolidation, he also seesno end to consolidation of farms.“With margins being squeezedever harder, it will force greaterefficiencies from producers. It’sthe same for all businesses. So yes,it will continue to create largerfarming operations—I don’t seethat stopping; it’s just a matter ofthe pace at which it will occur.”

Prospects dimming forgrain-only family farms

There is broad agreement amongfarmers and lenders in this area that thelong-term outlook for family farmersearning good margins from grain aloneare rapidly diminishing. The best oddsfor a farmer’s future success is to diver-sify with livestock, ethanol or to findsome other way to add value to grain.Growing grain alone, in anything otherthan in ever-increasing volumes, is notgoing to pay the bills, they say.

Regarding the controversy over thereturn to more traditional (i.e., higher)crop subsidies in the new farm bill,many here see it as a “damned if youdo, damned if you don’t” scenario.

“Today’s grain farmer cannot livewithout the program payments he getsfrom Uncle Sam,” Ehrp says. “Mybiggest concern is how much longer

urban people will allow the 2 percenton the nation’s people who farm tocontinue to be subsidized as heavily aswe are now.” If grain subsidies areslashed at some point, it will have a“devastating impact on land prices,”Ehrp continues.

“I look at government farm paymentsas essentially a pass through,” says JimPlagge, president of Northwestern StateBank in Orange City, another one of thearea’s thriving rural communities, about10 miles southeast of Sioux Center.“Producers take in more money fromthe government subsidies, but they pass

most of it on to their landlords or sup-pliers.” That’s because the costs of sup-plies and rents seem to move up in tan-dem with subsidies, he says.

Crop program payments seem to beaccelerating the rate at which farms areconsolidating, Plagge says. It works likethis: “If a 160-acre parcel comes on themarket for rent, a large producer—farming maybe 2,000 or 3,000 acres—may take it, figuring the high costwon’t have much impact on his aver-age,” Plagge says. “But for a little guyfarming 200 or 300 acres, it would be ahuge relative risk. So it does seem to bemaking the big bigger, which is theopposite of what it is supposed to do.

“Corn prices never get any betterbecause the supply keeps going up. Yetwe can’t be critical of the farm bill,because it’s what is keeping many ofour borrowers going,” Plagge contin-ues. “Without it, land prices would fall,and farmers who own land would suf-

fer.” On the other hand, a farmer whorents most of his land would likely seedrops in his rent.

Plagge also sees it as a given that farmnumbers will continue to shrink, whichhe says hurts the retail base of the com-munities, schools, etc. It is an ongoingwar of attrition, and those communitiesthat will win—or at least survive it—arethose that best diversify their economicbase with value-added agricultural busi-nesses and non-ag businesses—as OrangeCity and Sioux Center are doing.

“As a bank, our total loans outstand-ing may not change that much, because

someone will still be farming theland—although we’ll have fewer, big-ger accounts.” The bank’s portfolio isabout 50 percent agricultural loans.Plagge says his bank is coping with aslow down in the expansion of hogbarn construction, which peakedabout five years ago, but has sincedipped due to stricter environmentalregulations.

Orange City, he says, will contin-ue to look to agriculture as theengine that drives the region’s econ-omy, even while it hedges its bets bydiversifying its economy. Likewise,farmers who will be in the best posi-

tion for the long haul are those whodiversify with livestock, Plagge says.

Hog industry changingThe hog industry around the Sioux

County area has been going through amajor transition as more producersreplace traditional, outdoor hog-rearingfacilities with enclosed hog barns. Manyof these new facilities are growing hogsunder contract for large livestock integra-tors. Farmers typically own these hogbuildings, but the livestock integratorusually owns the hogs and calls the shotsin how they are raised, including whenthey will be sent to market.

As in other parts of the countrywhere this transition has occurred, thistrend toward contract hog productionhas not been without controversy.However, Sioux Center co-op leaderssaw the change in the hog industry asan on-rushing train that the co-op andits members would either have to board

The Tri-State Livestock Auction in Sioux Center provides alocal market for independent hog producers. “There is nosubstitute for active bidding” to maximize prices, saysmanager Ronald Jordan. But many in this area haveswitched to contract growing.


or get run over by. Given that choice,they decided to hop on board, and sofar they feel it has been a success forboth the co-op and its members.

Since Sioux Center Co-op launchedthe hog barn building program, Ehrpestimates it has put up as many as 70,000hog spaces in one year, or about 7,000buildings (averaging 1,000 head each).This year he expects the co-op will putup about 30,000 more hog spaces. Butthe construction rate is slowing, dueboth to tougher environmental regula-tions and the fact that many of the olderoutdoor facilities have now been con-verted to confinement barns.

Kempers says the co-op’s buildingcontractor provides farmers with aturn-key hog operation. The co-opsupplies the feed and lines up thefarmer with an integrator.

“The farmer and integrator gettogether, and, if things work out, theyusually enter into a 10-year contract,”Ehrp says. At the end of 10-years, thebuilding is paid for. The farmer then hasthe option to produce hogs on his own orenter into a new contract with an inte-grator. “So far the hog buildings haveretained their value very well,” Ehrp says.

“It was controversial in the begin-ning,” says board member Wynia. “Wehad a lot of individual, family producersraising hogs on their own farms, andthey saw the co-op as going into directcompetition with them. At the sametime, we realized the swine industry waschanging, and we couldn’t stop it.”

Packers and the public are demand-ing more uniform, lean pork, “which isharder to produce under the old pro-duction system, with so many differenttypes of farrowing operations andgenetic lines,” says Kempers. “Underthis system, there are fewer variables.”

The new hog production systemhas also has helped the co-op increaseits efficiency as a feed producer,Wynia says. “Now we have a nine-phase feeding program for hogs, andit’s easier to mix only nine rations offeed as opposed to 100.”

Some producers, including Kem-pers, did not wish to make the conver-sion to contract production, and

phased out of hog production. Until afew years ago, he had a 160-head, far-row-to-finish operation on his farm.“But I had to make a decision to fix upmy facility or get out, and I decided thereturn on labor was not what I wanted(from contract growing), so I got out.”

He continues to grow crops andworks part-time job as Christian educa-tion director for his church, which Kem-pers says works well with farming, sinceit allows him more free time in summerwhen the farm demands are greatest.

Wynia had a similar decision to

make for his 100-head dairy. Facedwith the need to modernize and expandthe dairy, Wynia instead closed thedairy 4 years ago. He and his brothernow focus on growing corn and soy-beans, but still raise about 100 dairyreplacement heifers each year.

Part of the reason the co-op startedits new hog system was in response torequests from young farmers who weredesperately seeking help to get into, orstay, in farming, Ehrp says. “We’ve hadso many young producers come to usin the past 8-9 years and say, ‘can youhelp me stay on the farm?’ We felt thiswas the most viable option for many.”

But what about fears that hog pro-ducers are going down the same routeas poultry producers, and will wind upas low-paid, piece-wage laborers work-ing for integrators?

“Absolutely, those fears do exist. Weare seeing the hog industry head in thesame direction as the poultry industry,”Ehrp says. “The big players are gettingbigger, and the small producers are say-ing ‘I can’t compete any more,’ and aregetting out. It’s sad. We certainly don’tpromote it, but it is the trend and it’shard to buck it. Even the cattle indus-try is now beginning to head in thesame direction.”

In the past, it was those periodic$60-price spikes that made hogs themortgage payers, Ehrp says. “But thosedays are probably gone. There’s just toomany hogs out there and the barns arealways full,” he says, noting that thetremendous growth in hog productionrecently in places such as Colorado andOklahoma has also swelled the pipeline.

Making the changeHarlan Klassen and his four sons, ages

28 to 40, grow 5,000 acres of corn andsoybeans near the town of Little Rock, inLyon County, north of Sioux County. Inaddition to all that cropland, his sonsearn supplemental income doing jobssuch as driving a truck for the co-op andworking as mechanics. But they also havediversified into livestock.

The two oldest brothers, Dan andDarwin, are partners in a 200-headherd of registered Angus/Limousinecattle. The younger brothers, Bradand Rick, have enrolled in SiouxCenter’s hog program, and are nowraising 2,400 hogs in two enclosedbarns. Their integrator delivers thepigs at 40 to 50 pounds, and thebrothers feed them until they weigh220 to 280 pounds.

Brad says the labor commitment isreasonable, leaving him plenty of timefor his other farming and off-farmwork. The big attraction of this systemis that the farmer knows how much hewill make at a time when so many pro-ducers are losing money on hogs.“This way, you are guaranteed a returnfor your labor,” he says.

At one time, the Klassens raisedtheir own hogs, but they saw littlefuture in anything other than contractgrowing. “Raising hogs (independently)

Mark Van Roekel, who farms near OrangeCity, is not one to put all of his eggs in onebasket. In addition to crops, his diversifiedfarm includes hogs, cattle and goats.


on family farms is dying around here,”Harlan says.

Unlike Sioux Center and OrangeCity, you see plenty of shutteredstorefronts in the nearby town of Lit-tle Rock. “Our town is slowly slip-ping away,” Harlan says, ticking offthe businesses that have closed inrecent years. “We had a feed store, abutcher shop, another grocerystore—they’re all gone now. We hadthree or four cafes, but only one now.And we lost our high school 10 yearsago in a sharing agreement withanother community.” As editor of thetown’s newspaper for 24 years, hiswife, Virginia, has closely monitoredthe town’s fortunes.

Despite the town’s struggle and lowgrain and livestock prices, Harlan sayshe “feels blessed” to be doing some-thing he loves as much as farming, andthat all four of his sons have been ableto go into the business with him. “AndI’ve got the four best daughters-in-lawon earth,” he adds.

“I’ll never leave here,” he says whileoffering some hay to his Paint ponies.But Harlan does admit feeling a bitenvious of Sioux Center’s success.Informed that Sioux Center got a goodrainfall the night before while his farmgot just a trace, Harlan says “Gee, theyeven get all the rain. Sioux Center isjust a garden spot—there’s no otherway to look at it.”

Still independent Mark Van Roekel, another board

member of Sioux Center Farmers Co-op Society, farms near Orange City andis still operating as an independent hogproducer. He has a highly diversifiedlivestock and crops farm, and prizes hisindependence too much to contem-plate the switch to contract growing.

“I’m too independent to be a con-tract grower—I’m just not ready for ityet,” Van Roekel says.

He has a 1,200-pig nursery as wellas two hog finishing barns with 1,200head each. He also raises 300 fed cattle,300 nanny goats and grows 350 acresof crops.

None of the markets—livestock or

crops—look good these days, he says ashe brushes away some hungry goatsintent on nibbling his feet. “This is theworst year I’ve had—the hog markethas been poor and the cattle market—which looked good until April—hasalso been going downhill.”

Van Roekel has a hog marketingcontract with Farmland Industries,which has a premium matrix that paysa lump sum based on a feed conver-sion tables and quality grading. Underthe contract, Farmland must approvethe feed source—which in his case isSioux Center.

Despite the disappointing prices,Van Roekel, like Klassen, loves life innorthwest Iowa. “Life can’t be muchbetter than it is here,” he says. Hemoved away as a young man to farmnear Fort Dodge, Iowa, but returned toOrange City about 14 years ago. “Thisis where I was born and raised; it’swhere our religious faith is based andit’s where we decided we wanted to liveand raise our kids,” says Van Roekel,who is also a director on his rural waterdistrict board.

A local marketing outlet in SiouxCenter for independent hog producersis the Tri-State Livestock Auction.Manager/owner Ronald Jordan saysbusiness volume has been buildingsince he bought the auction about 6years ago. Indeed, he says the 2,000-to-3,000 hogs he auctions each week is upsharply from when he bought the auc-tion. A typical producer selling at theauction yard has “maybe 40 head tosell, but we get some larger ones too,with 200 to 300 head.”

Not surprisingly, he takes a dimview of contract growing. “The trendtoward contract growing is killing themarket,” Jordan says. “There is no sub-stitute for competitive bidding” tomaximize prices, he says.

Jordan says he’s had success expand-ing the scope of bidders to include sev-eral packers in Mexico and states as faraway as Louisiana, Texas and the WestCoast. This increase in the yards’ mar-keting sphere is helping sellers earn $3-$4 a head more than others are earn-ing, Jordan says.

New laws slowing industry growthWhether independent or contract

growing, one thing all hog producersare concerned about is how the industrywill be impacted by Iowa’s new environ-mental laws, enacted primarily to limitsmells associated with hog production.

“Last winter, I told my board Ithought we would build 70 hog build-ings this year,” Ehrp says. “But becauseof changes in environmental laws, Ithink it will be closer to 30. More plan-ning and time is required up front nowbefore you can build, and distancebuffers are greater. It will eliminate alot of hog building construction.”

Ehrp says many producers are now“gun shy” about putting up hog build-ing because of fear of potential lawsuitsthat can pit neighbor vs. neighbor.Ironically, Ehrp says the new enclosedhog barns, which have waste lagoonsunder the barn, generate far less smellthan outdoor lagoons.

“This community is supportive ofag—to a point,” Ehrp says. “But whenthe wind is from the west, the townsmells the odor from the co-op’s cattlefeedlot, and that can be an issue withthe younger generation moving in.They are not as tolerant of the smellsas the older generation.

“They need to remember thatSioux County is a livestock county—itis why we are so successful. We haveto accept a certain amount of smelland live with it.”

Ehrp recalls the complaints the citystarted getting after one new hog barnwas erected. “Trouble is, no hogs hadeven been delivered to it yet. Peoplewere apparently smelling a nearby citywater treatment plant,” Ehrp says,shaking his head. “Sometimes the per-ception is far worse than the reality.”

Could it drive more of the industryoverseas? “If we don’t change some leg-islation (environmental and anti-packerlivestock ownership laws), it sure could.If they make it tough enough on ourindustry, South America and Mexicosure want our business—and there hasalready been much expansion of the hogindustry there. Some day we may wakeup and say, ‘what did we do here?’” ■


By James BaardaUSDA RBS [email protected]

Editor’s note: In the last issue we exam-ined the circle of seven responsibilities thatall directors have. This second article in aseries of three discusses standards of conductapplied to directors and the sources of legalliability imposed on directors when theydon’t meet the standards. It concludes witha discussion of protections for individualdirectors against personal liability. Just asresponsibilities can be divided into sevendistinct, yet related, items, standards ofconduct, liabilities and responses can beviewed in seven steps.

Directors’ roles inperspective

A number of responsi-bilities are imposed on acooperative board of

directors, but where do individual direc-tors fit in? Four perspectives of direc-tors’ roles help identify board and indi-vidual director responsibilities. Startingwith the broadest perspective and nar-rowing the view to the individual direc-tor gives the following breakdown.

The cooperative is a business orga-nization, almost always a corporation.All of the substantial rules governingcooperative directors come from cor-porate law.

The cooperative is a very specialkind of corporation. Cooperatives oper-ate according to appropriate coopera-tive rules or principles. These uniquecooperative attributes define coopera-tives’ unique objectives, they requirespecialized income distribution andfinancing techniques, they impose

unusual decisions on the board of direc-tors and they give cooperative directors“something else to think about.”

Narrowing the perspective further,the board of directors acts as a body.The power to act on behalf of thecooperative is given to the board ofdirectors as a body, not to individualdirectors. No special power is given toan individual board member to act offi-cially. As an individual, a board mem-ber has no greater authority than anordinary cooperative member. Theboard derives its authority from theincorporation statutes, articles of incor-poration, bylaws, and the members.These all identify the board of direc-tors as the governing body.

This perspective further defines anindividual director’s participation in thecooperative. Decisions are board ofdirector decisions, so an individual

director must be able to work effectivelywithin the dynamics of the board toinfluence board decisions. The board asa whole will be effective only if proce-dures, committee structures and interac-tion is conducive to good decision-mak-ing. If a director objects to a decision, itis imperative that a negative vote berecorded, otherwise the director will beheld to have agreed with the decision.

Responsibilities, standards of con-duct and possible liabilities fall onboard members as individuals. If thestandards of conduct are not met, indi-vidual directors may be liable to share-holders and members, to the coopera-tive, to creditors, to patrons and to thepublic through civil or criminal laws.What are the standards of conduct bywhich directors are measured?

2. Standards of conductStandards of conduct for corporate

directors have been developed overmany years by judicial decisions andlegislative action. Although cooperativedirectors face numerous special prob-lems, no separate set of standards hasever been developed for cooperativedirectors. Therefore, corporate rulesgenerally apply to cooperative directors.

Standards applicable to cooperativedirectors (as is the case with corporatedirectors) are usually divided into three“duties.” These are summaries of manydecisions and statutes and are stated ingeneral terms in this article. The threeduties are “duty of obedience,” “duty ofcare” and “duty of loyalty.”

3. Duty of obedienceThe term “duty of obedience”

sounds odd but is logical when

Co-op d i rec to rs he ld to h igh s tandards

M A N A G E M E N T T I P

1.

The Circle of SevenResponsibil it ies(As described in the previous articlein this series, see July-August 2002issue, page 30.)

Directors:1. Represent members2. Establish cooperative policies3. Hire and supervise management4. Oversee acquisition and preserva-

tion of cooperative assets5. Preserve the cooperative character

of the organization6. Assess the cooperative’s performance7. Inform members

explained. The duty means first thatdirectors must perform their roles inconformity with the statutes and termsof the cooperative’s documentedrequirements for the directors. Theauthority given to the board of direc-tors is defined, as is the purpose of thecooperative. Acts beyond those limitsare “ultra vires” and are not authorized.

Neither may the board make deci-sions that are either themselves illegalor that will cause the cooperative to dosomething illegal. The duty of obedi-ence also implies that the board shouldmandate necessary records and record-keeping, internal procedures, policiesand compliance programs, then super-vise the process to the extent necessaryto protect the cooperative from illegalor improper actions.

4. Duty of careThe duty of care, also called the duty

of diligence, has developed in judicialdecisions but is also found in many cor-porate statutes. Statutes typicallydescribe the duty of care in three parts:good faith, prudence and judgment.

Directors are required to act in goodfaith in all circumstances. Directorsmust also exercise care that an ordinaryperson in a like position would in simi-lar situations. Finally, a director mustmake decisions for the cooperative in amanner that he or she reasonablybelieves to be in the best interests ofthe cooperative. Directors have thehighest obligation to the cooperativeand stand in a relationship of trust—afiduciary relationship. Good faith, con-scientious care and best judgments areexpected of each and every director.

Diligence and care raise two particu-lar challenges for cooperative directors.Directors may fail in their duty if theboard does not adequately supervisemanagement. The board must devisesome way to be sure that managementand employees conduct themselves inthe cooperative’s affairs in an ethical andlegal manner. The board also establishesthe cooperative’s strategic direction andevaluates management’s progress towardthe cooperative’s goals. In addition toselecting top management (usually themanager or CEO), the board’s duty ofdiligence requires that the board evalu-ate management’s performance, estab-lish succession plans and, if necessary,dismiss top management.

Often, questions about a director’sperformance revolvearound what the direc-tor knows. Generally,ignorance does notexcuse a director fromliability. Directors mustknow what they aredoing or they cannotsatisfy their duty of care.The knowledge requirement is usuallydivided into two important parts.Directors will be held accountable forwhat they know and what they shouldknow. A director who is actually igno-rant of a fact is not excused if the lawrequires that the fact should have beenknown by the director.

How is a director to gain this knowl-edge? Directors are sometimes said tohave a duty to inquire about facts whichare required for them to carry out all oftheir responsibilities. Directors have aright to inspect all books and records.

They have the additionalduty to understand thefinancial condition of thecooperative and its busi-ness operations. Direc-tors are presumed toknow what is in thecooperative’s books andrecords. As a generalstatement, directors willbe charged with knowl-edge of what it is theirduty to know.

5. Duty of loyaltyLoyalty is perhaps the most trouble-

some area of liability in corporate law,including cooperative law. It is trouble-some because it is not well understood,and the presence of disloyalty or conflictsof interest is devastating to a director’spersonal position of trust in the coopera-tive. As has been mentioned, directorsoccupy a position of highest trust andconfidence upon which the cooperativeand the entire membership relies. Thatposition must be protected in any actiontaken and in any decisions made.

Several kinds of behavior are prohib-ited by the duty of loyalty. Self-dealing,where the director makes a special prof-it by doing business with the coopera-tive, is a breach of the duty of loyalty.

As discussed in the previous article,directors of cooperatives are placedalmost automatically in a position ofdealing with the cooperative. This isnot a problem if handled properly. Infact, a common statutory provisiondescribes permissible situations. A typi-cal provision states “No director, duringthe term of his office, shall be a party toa contract for profit with the associationdiffering in any way from the businessrelations accorded a regular member orholders of common stock of the associa-tion or others, or differing from termsgenerally current in that district.” Con-flicts of interest situations always posespecial challenges.

The duty of loyalty imposes otherrestrictions on directors. A director willviolate the duty of loyalty by dealingwith someone directly who could haveotherwise dealt with the cooperative.This is called “appropriating the coop-erative’s opportunity.” Loyalty alsorequires the highest degree of honestyand fair dealing with the cooperativeand on the cooperative’s behalf.


Do corporate statutes applyto cooperative directors?

Generally yes, for two reasons. Cooperative incorpo-ration statutes usually state that corporate law appliesto cooperatives unless corporate law conflicts. Coop-eratives are incorporated bodies that have all of thebasic characteristics of corporations; directors’ roles,duties and responsibilities are no exception.

Conflicts of interestConflicts of interest involving directors are unavoid-able and can have serious consequences if not handledproperly by the board and the cooperative. This topicwill be further examined in the third part of this series.

Directors are often in a positionwhere they could violate the final aspectof the duty of loyalty: that of confiden-tiality. Directors are privy to informa-tion about the cooperative that may notbe public. This is particularly the casewhere directors have access to informa-tion about the affairs of other membersof the cooperative. Directors are understrict prohibitions about either divulgingconfidential information to anyone elseor using it for their own benefit regard-less of the harm to the cooperative.

Generally, a violation of the duty ofloyalty, typically in situations referredto as conflicts of interest, is the quick-est and surest way to make a directorliable for wrongdoing.

6. The business judgment ruleDirectors constantly exercise judg-

ment on behalf of the cooperative, andsometimes that judgment does not leadto the best outcomes for the coopera-tive. Unexpected events can turn a goodplan bad. Or directors may simply makea mistake in judgment. What happenswhen directors’ actions lead to losses orother detriment to the cooperative?

Normally, courts will not interferewith the internal operations of a busi-ness to replace the judgments of thedirectors with the court’s own judgmenton business matters after the fact. Thebusiness judgment rule says that, absentfraud or self-dealing, business judg-ments made by directors will not beoverturned by the courts and will notlead to director liability. Directors donot and cannot guarantee the success ofthe cooperative or each decision made.

Courts have generally given threereasons for the business judgment rule.Few members would be willing toserve as cooperative directors if theyfaced personal liability for good faitherrors in judgments that results inharm to the cooperative. Courts alsorecognize that courts themselves areill-equipped to make business judg-ments for directors and that second-guessing board decisions is not an effi-cient way to monitor directors. Finally,a cooperative cannot be managed effi-ciently if directors are not given wide

latitude in law to handle the coopera-tive’s affairs.

It is important to understand the lim-its of the business judgment rule. Courtsusually say that the authority of directorsis absolute when they act within the law,and questions of policy and internal man-agement are—in the absence of nonfea-sance, misfeasance or malfeasance—leftwholly to their discretion. The rule is nota protection if the offending action wasan abuse of the board’s discretion, wastainted with board member conflicts ofinterest or was a result of the directors’abdication of their duties to the coopera-tive. Courts will step in and hold direc-tors liable for their actions when direc-tors are guilty of willful abuse of theirdiscretionary powers, or bad faith, or ofneglected duty, or of perversion of thepurposes of the corporation, or whenfraud or breach of trust is involved. Oth-erwise, directors are not personally liablefor mistakes while exercising theirinformed, best judgment.

7. Minimizing riskAn easy but inadequate suggestion

for avoiding problems as a cooperative

director is to understand and appreciatethe responsibilities listed in the firstarticle in this series, know and adhereto all standards of conduct in this arti-cle and make no mistakes that may bedetrimental to the cooperative. Thefirst two suggestions are in the controlof each director and are, in fact, thebest defenses to legal challenges todirector performance.

Protection is best when a proactiveattitude is adopted by each director toknow the responsibilities and standards,understand what it means for the direc-tor’s performance and identify particu-larly sensitive issues in the cooperative,for the board of directors and regardingthe director’s own personal performance.

Directors may also give attention toseveral other actions and practices thatare beneficial to their performance.Board structure, proper use of commit-tees, effective board discussions andleadership, flows of information frommanagement to the board and goodboard-management relations can avoida number of problems. Directors mayrely on experts, advisors, employees,


Implementing exerciseEstablish a schedule to consider—at board meetings or ancillary meetings—

each of the standards of conduct imposed on directors. Systematically considereach standard and its requirements. At each meeting, thoroughly examine oneof the standards outlined in this article.

• What specifically does the board currently do to meet the standard?• What are board’s weaknesses regarding the standard?• Does each director have the skill, interest and time to consider and respond

to the standard’s requirements?• Does the board have the knowledge and information necessary to meet the

standards?• What specific steps can be taken to make the board meet every standard?• Is there consensus on the board’s performance?• Would members agree with the board’s self-assessment?Even more than the board’s responsibilities, the standards are personal to each

director. Each director should individually address the issue and propose his orher own solution to problems perceived about the standard of conduct under dis-cussion. These sessions may be more effective if management is not present.

The board should also consider the mechanisms the cooperative has in placeto protect directors, such as indemnification provisions and D & O insurance.Assessment of state law applicable to the cooperative and directors will be partof the analysis.



By Glyen HolmesLiaison with New North Florida Cooperative, USDA Natural Resources Conservation Service Vonda RichardsonMarketing Specialist, Florida A&M UniversityDan SchoferAgricultural Engineer, USDA Agricultural Marketing Service

Editor’s Note: The early achievements of the New North Florida Cooperative werefeatured in the July/August 1999 Rural Cooperatives. This article reports on theprogress of the past 3 years, and how the cooperative has expanded the business beyondits initial scope

ew North Florida Cooperative (NNFC) is a new-generationcooperative formed by small-scale vegetable and fruit farmers inthe Florida Panhandle to create and expand marketing and pro-cessing opportunities for its members. NNFC members say thatwhen they farmed individually, they were “price takers.” The

cooperative has enabled them to become “price makers” by taking greater con-trol of their products and providing member-growers with bargaining power inthe marketplace.

“Having a market, knowing where your products are going and when youneed to harvest makes farming a lot easier,” says Spencer Lewis, an NNFCmember. “Working with the co-op saves me a lot of time compared to sellingalong the road, and it eliminates wasted crops in the field.”

From its initial success helping members sell collard greens and other crops toa local school district, this Florida cooperative has now expanded its scope ofoperations to 15 school districts in three states, added product lines and increasedthe level of value-added preparation and packaging. It has also created a networkof similar cooperatives in its region which are working together to expand value-added processing and marketing opportunities for small-scale farmers.

The cooperative recently built a structure to house its office and a classroom.A phone, fax, computer and answering machine located in a central officeenables NNFC to easily communicate with its members and customers. EleasaVarner, NNFC’s office manager, notes, “Keeping files and records organized andsecure in a central office has really helped with payments, bills and finances.”

Putting customers firstThe co-op management team made its first food service industry sale to

J’Amy Petersen, food service director of the Gadsden County, Fla., School Dis-trict. The presentation demonstrated the co-op’s professionalism, courtesy, seri-

N

Taking i t to the next leve l Success of small Florida vegetable co-op leads to a network of similar cooperatives

From the top: Collard greens thrive in the soil of north-

ern Florida.NNFC member Spencer Lewis harvests

and loads greens in plenty of time to meetthe deadline for a scheduled delivery.

Greens are washed and chopped at theco-op’s packing house.Photos by Dan Schofer, courtesy USDA/AMS

ousness of purpose and accountability. It also stressed that the co-op is as aDepartment of Defense-certified vendor.

After its presentation, the co-op management team carefully listened toPetersen discuss the school district’s needs. The cooperative then arranged todeliver free samples to Gadsden County schools to demonstrate product qualityand the co-op’s dependability. At that time, the cooperative did not have anyprocessing equipment, so the participating farmers washed, chopped and baggedthe collard greens by hand.

The next day the deliveries were made on time. Petersen and her cafeteriamanagers were happy with the quality and freshness of the products and thetimeliness of the deliveries. NNFC has been providing fresh collard greens toGadsden County schools consistently ever since.

“The fresh peas and greens have really improved the meals we serve to thechildren,” says Mitchell Williams, a cafeteria manager in Gadsden County. “Thechildren love the fresh vegetables. I enjoy working with the co-op and look for-ward to working with them in the years to come.”

Expanding to more schoolsNNFC has kept Gadsden County as an important customer and expanded its

market to schools in other areas, including Jackson County and Albany County,Ga. Regularly servicing several school districts has helped the cooperative toacquire capital, invest profits in equipment and necessary infrastructure anddevelop a small amount of working capital. The cooperative applied for, andreceived, two small loans from the Jackson County Development Council(JCDC) to purchase refrigerated storage and a small processing machine. JCDCis a community-based, nonprofit organization established to increase local eco-nomic opportunity in Jackson County (a designated Empowerment Zone).

Ever since the cooperative formed, JCDC has been helping it acquire capitaland develop a good credit history. By making its loan payments on a regularbasis, the cooperative has established the foundation of a good credit history.

Profits from consistent sales have been invested in processing buildings andgradual improvements in transportation. The improvements from the acquiredcapital and invested profits greatly increased the amounts of product that couldbe processed, stored and delivered. This experience has created the groundworkfor larger scale deliveries in the future.

It was important to develop a working capital fund to cover bills due betweenharvest and the receipt of payment from customers. Early on, the co-op estab-lished a policy of paying the farmer for the harvested produce at the time prod-ucts were picked up for processing.

Schools as customersOver the past 2 years, NNFC has delivered produce to 15 school districts in

the region (table 1, page 23). Some of the school districts have been steady cus-tomers for years, while other sales were “pilot projects” consisting of one- or two-time sales to new school districts to demonstrate the co-op’s quality and deliverystandards. Building on these initial deliveries, NNFC plans to develop strong, sus-tainable business relationships with those “pilot” school districts as well.

Diversifying to military marketsNNFC has experimented with diversifying its initial customer base. The

cooperative delivered muscadine grapes to the Defense Subsistence Office(DSO) of the Department of Defense (DoD) in Jacksonville, Fla., in September2000 for distribution through military base commissaries. This office providesfresh produce to over 30 military bases, from South Carolina to the Caribbean.It also provides fruit and vegetables to over 2,200 schools.


Processed collard greens are bagged andloaded into a co-op truck for delivery to oneof the 15 school districts in three states cur-rently being served by the cooperative.

NNFC had previously worked withthe DSO to become a certified vendor,so there was already an existing rela-tionship. This breakthrough sale toDoD was a first for the cooperative,and has opened the door to futuresales. The sale helped cooperative lead-ers realize that they needed to investi-gate other produce varieties in order tosupply the DoD and help boost profits.

Pilot retail salesRetail grocery sales are also

another market channel thatthe cooperative has pursued.Between 1998 and 2001,NNFC sold value-added col-lard greens to local Winn Dixieand Grocery Outlet stores. Leafy greens were very popu-lar with customers because oftheir freshness and conve-nience. Store produce man-agers were happy with thecooperative because of thefreshness and consumeracceptance.

During the summer of2001, one store sold 200 bagsof NNFC greens per week.Nevertheless, logistics andfluctuating demand made thismarket difficult to sustain.

While NNFC is not supply-ing any retail grocery storesthis year, the sales provided valuableexperience and increased cash flow. In2002, the cooperative is focusing onschools, its primary market.

Product linesThe cooperative’s main product

remains collard greens, which areoffered through two separate lines: afine cut and a country cut. The cooper-ative also recently began selling peas toschools. Pea lines available to schoolsare: black-eyed, purple hull, butter,cream #4 and cream #8. The coopera-tive is planning on expanding theamounts and variety of peas sold toschools this fall.

NNFC is looking to sell a french frycut of sweet potato, supplied by theSweet Potato Growers Association in

Mississippi. It has also grownHabanero peppers, which were sold inbulk to a regional hot-sauce company.

The cooperative has experimentedwith the strawberry market, sellingfruit to schools both for breakfasts andlunch deserts. The perishability andmarket pressures on prices hurt theprofitability of the co-op’s strawberrytrade, so it has discontinued strawberryproduction and sales.

The co-op also supplied blackberriesfor use in desserts, such as cobblers andpies. But blackberries are harvestedmid-summer, creating perishabilityproblems, so the cooperative has dis-continued production.

The cooperative has worked closelywith Dr. Kathleen Colverson, southeastprogram manager for Heifer Interna-tional. Colverson says, “Based on myyears of experience in working withlimited-resource farmers, I am excitedabout NNFC’s progress. This type ofmarketing approach can easily beduplicated by other groups of farmers.”

The cooperative is currently raisinggoats for meat. There have been somesales of ground chevron (goat meat) toschool districts and additional sales areplanned for the fall.

Value-added processingNNFC adds value to its leafy greens

by washing, chopping, bagging andweighing them. The country cut is alarger, home-style cut while the finecut consists of 1/4-inch squares.

Through careful attention in theprocessing stage, the cooperativeassures consistent quality and volumesof its final products. It realized early onthat it had to differentiate itself and its

products from other suppli-ers. NNFC chose fresh,leafy greens because therewas an undeveloped marketniche locally and in schoolsfor them.

Fresh was the only optionbecause the frozen andcanned greens markets werealready filled by establishedcompanies. Washed, cut and“ready-for-the-pot” featuresnot only provided conve-nience, but also differentiat-ed NNFC’s products fromother product lines.

Value-added processinghas given NNFC access tomarkets that would beunavailable with raw prod-ucts, such as bunches ofwhole greens. Cafeteriamanagers and workers donot have the time to wash

and chop greens to serve hundreds ofchildren. The convenience of NNFC’sgreens save cafeteria managers andworkers a great deal of time.

NNFC’s value-added processing,combined with the co-op’s bargainingpower, allows the cooperative to set aselling price that is fair to customersand, at the same time, provides a rea-sonable return to its members. Thisstands in contrast to individual farmersselling bunched greens straight fromthe field.

The flip side of value-added pro-cessing is that NNFC has had to spendmuch time and effort acquiring neces-sary capital, purchasing or leasingequipment, maintaining and repairingthe equipment and closely monitoringits quality standards.


Dan Schofer of USDA’s Ag Marketing Service, who is providingtechnical assistance to the New North Florida Cooperative, dis-cusses delivery needs with school cafeteria manager MitchellWilliams in Gadsden County, Fla.

The Jackson County Development Council Inc.(JCDC) presented NNFC with a USDA Rural BusinessEnterprise Grant (RBEG) check for $327,863 on Aug. 8,2001. JCDC wrote the grant proposal and wasresponsible for its administration. The funds wereused to improve infrastructure and provide workingcapital for NNFC.

“Sometimes it’s hard to pullyourself up by your bootstrapswhen you don’t have a pair ofboots,” Chuck Clemons, USDARural Development statedirector for Florida, told thecrowd at the check presenta-tion ceremony. “I am hopingthat today, by delivering thischeck, we can provide oursmall, economically disadvan-taged farmers with some big-sized boots in the form ofequipment and operating cap-ital so that this goal can beachieved.” Lunch served atthe event included NNFC’sfresh collard greens.

NNFC used the funds fromUSDA Rural Development and JCDC to purchase fourrefrigerated trucks, which, along with two vehiclespreviously purchased, give the co-op a small fleet ofrefrigerated trucks. These vehicles are essential forthe success of both the cooperative and the SmallFarmer Distribution Network. The fleet of trucks willhelp expand marketing opportunities, both geographi-cally and in volume.

The USDA RBEG program helps public bodies andprivate, nonprofit corporations finance and facilitate thedevelopment of small and emerging private businessenterprise in rural communities of fewer than 50,000people. Grants may be used to establish a revolvingloan fund to provide “gap” financing to small and

emerging businesses, to purchase or lease equipmentand machinery, for technical assistance, such as mar-keting and feasibility studies, and training for ruralentrepreneurs.

The small business being assisted must have lessthan $1 million in gross revenues and fewer than 50

new employees. The RuralBusiness-Cooperative Ser-vice’s Specialty LendersDivision, administeredthrough USDA Rural Devel-opment, has a number offlexible financial tools toassist small and emergingrural businesses. If you’reinterested in learning moreabout how USDA can assistrural businesses or coopera-tives, contact the USDA Rur-al Development State Officeserving your community, orvisit: www.rurdev.usda.gov .

Several other govern-ment agencies and organi-zations have also helpedNNFC improve its opera-

tions. USDA’s Natural Resources Conservation Ser-vice has provided outreach to the co-op since itsinception for production and organization structure.USDA’s Agricultural Marketing Service provided technical assistance in postharvest handling andmarketing. The West Florida Resource Conservationand Development Council facilitated cooperativeagreements with USDA/AMS.

The Florida State Bureau of Farmers Markets provid-ed the cooperative—through the Agriculture VentureServices Program—with lease incentives, assistancewith equipment needs and business plan development.Heifer International assisted NNFC with goat productionand agricultural trials. ■

USDA lends co-op support with Rural Business Enterprise Grant

Packaging a key factorThe cooperative felt it was impor-

tant to develop quality packaging tomaintain the quality and freshness of itsproduce. Pa