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CROPP CooperativeThe Cooperative Regions of Organic

Producer Pools

A Case StudyPrepared for the North Central Initiative for Small Farm Profitability

By the University of Wisconsin Center for CooperativesFunded by the Initiative for Future Agriculture & Food Systems

A Program of the U.S. Department of Agriculture

Authors: Maria Powell & Greg Lawless

January 2003

CROPP Cooperative/Organic Valley 1

IntroductionThis case study is one of four

in a series that are focused on so-called “new generationcooperatives,” or NGCs. Whilethe first recognized NGC datesback to 1972, most were formedin the 1990s, and they continueto be formed today.

NGCs differ from traditionalcooperatives in several ways.First, farmers invest significantdollars up front by purchasingshares in the business.

Second, each purchasedshare allows and obligates aproducer to deliver a set quantityof raw product to the co-op.

Third, there are a limitednumber of shares, and in thatsense the co-op is closed orlimited to a set number ofproducers. This is intended tomatch incoming raw products tothe capacity of the plant and thedemand for the end product.

Finally, the ownership sharescan be traded among farmers,and the price of those shares may

rise or fall, reflecting how muchthe farmers expect to benefitfrom their membership in thefuture.

The co-op in this case studymight best be termed a “hybrid”NGC. Consideration of theCROPP Cooperative of LaFarge, Wisconsin will follow anoverview of the organic industryin which it operates.

Organic Industry Trends

Sales of organic food havegrown dramatically in recentyears in the United States andinternationally. In the early1990’s, organic food becameincreasingly available to U.S.customers as natural food storesbegan growing in size andproduct selection. The growth ofnatural product supermarketssuch as Whole Foods and WildOats helped spur this growth.During the late 1990’s,moreover, conventionalsupermarkets began integrating awider selection of organic

products. (Myers, 2000).In 2001, organic sales at

conventional outlets accountedfor 49% of total organic retailsales—with most of the rest(48%) accounted for by healthand natural product store sales.

Sales of organic foodsoverall in the U.S. are growing20-25% annually. Organic saleswere estimated at $7.8 billion in2000, a 20 percent increase over1999 sales. Sales over theInternet are expected to growfrom $0.5 billion to $3 billion inthe next 4-5 years.

Organic sales are alsoincreasing in world markets--particularly Japan, Denmark,France, Germany, Italy, theNetherlands, Switzerland, andthe U.K. The Natural FoodsMerchandiser (NFM), anindustry trade publication,estimates that exports accountedfor about 5% of total U.S.organic food sales throughout the1990’s. (Greene, 2001)

Not surprisingly, organicfarming is increasing along withorganic food sales. According tothe USDA’s Economic ResearchService, organic cropland morethan doubled in the U.S. duringthe 1990’s. Organic certifyingagencies in several statesreported substantial increases inorganic certification from 1997-1999.

In the livestock sector, eggsand dairy are growing evenfaster than other areas. Thenumber of certified organic milkcows nearly tripled between1992-1997 and nearly doubledbetween 1994—1997. (Greene,2000) Organic milk sales grewby 500 percent between 1994and 1999 as more organic milkprocessors entered the market

Share of U.S. Organic Food Sales by Retail Outlet Type (2000)

Type of Outlet Share (%)Mass Market Outlet 49% Supermarkets 44% Other mass market 5%Health & Natural Product Sales 48% Natural food supermarkets 31% Natural food stores 12% Natural food cooperatives 2% Supplement chains/stores 3%Farmers’ Markets/CSA’s 3%Total 100%

* Drugstores, mass merchandisers** Community supported agriculture

TABLE 1: From Myers, 2001

and more mainstreamsupermarkets began to sellorganic products.4 Organic milksales reached $75.5 million in1999, and in 2000, organic dairyproducts made up 11% of U.S.organic food sales. (Myers,2000)5

CROPP Cooperative/Organic Valley

CROPP Cooperative hasridden the crest of this wave ofgrowth in the organic sector.Starting in 1988, they havegrown from nothing to a $100million company in just overthirteen years.

For most of those years, theacronym CROPP stood for the“Coulee Region OrganicProduce Pools”. Only recently,in recognition of their nownational scope of membership,did they abandon the namesakeof their local area in favor of themore expansive “CooperativeRegions of Organic ProducerPools”.

And while familiar toconsumers around the country bytheir brand name, "OrganicValley,” closer to home the co-op is known simply as CROPP.

In 1998, the co-op wasrecognized by the Governor ofWisconsin as the state’s #1 RuralInitiative. This was anacknowledgement of the impactthat the co-op has had in thestate, especially within the farmeconomy. Driven by a companyphilosophy that is stronglycommitted to the family farm,CROPP’s success has beentransferred back to its farmer-members in the form ofconsistently higher milk prices

and aequit

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2%

Meat 3%

Soy 6%

Bulk Foods8%

Chart 2: Myers, 2001


significant return on theiry investment.

t-up Strugglesike most other successfulesses, CROPP’s startup was with obstacles. Theany was initially formed toet organic vegetableucts. But according to co-der Jim Wedeberg, they shifted to dairy, in partuse they realized that a year-d-market for organic dairyucts would be more stableseasonal vegetable markets.ermore, they decided to

s on cheese products, which a longer shelf life than fluid and therefore required lessse management and staff. etting into the organic dairyet, however, was difficult.n Wedeberg approachedge Siemon in 1988 abouting an organic milk pool, were no standards availableertifying milk as organic. Atime, the Organic Cropovement AssociationA) concentrated on fruitsegetables. Consequently,nd the other dairy farmerso form their own organicards on feeding and herdh practices and submit them

to the national OCIA for critique.This involved a lot of researchand meetings.

CROPP also faced regulatoryobstacles. Wisconsin lawsprohibit a group of farmers fromshipping their milk togetherwithout appropriate licensing.Fortunately, several of theoriginal farmers were membersof the NFO, which offered tohandle the required licensing,write milk checks, and test milkas long as CROPP dairymembers joined the NFO.

According to Wedeberg, the“NFO was the reason we got offthe ground.” (McNair, 1994) Inaddition to the regulatory andadministrative assistance, theNFO helped finance the co-op’sinitial cheese inventory with asubstantial loan offered underexceptionally good terms.


“Creative financing” wasanother key to CROPP’s earlysuccess. For instance, theyneeded a building to house theirnew operation, and found one inLa Farge that cost only $25,000.However, the cash-strappedfounders lacked the money foreven that modest investment. Sothey worked out a deal with thebuilding’s owner to liquidate anold vat in the basement of theproperty, and they used theincome from that sale to covertheir down payment!

Ultimately, however, theability of the cooperative tosurvive these early years was dueto the commitment of theCROPP farmers and theirwillingness to take financialrisks. The seven original CROPPproducers shipped 20,000pounds of milk every other dayin 1988. Cheese was made atSpringdale Cheese Factory nearRichland Center. At that point,CROPP was not involved inmarketing their products, butrelied instead on a distributor.

In those early years, theprices that the co-op paid itsfarmers for their milk hardlycovered their higher organicproduction costs. That’s becausetheir original distributor sold lessthan 40% of the member’sproduction through organicchannels, unloading the rest atcommercial market prices.

Through 1991, after creatingits own label and trying toexpand its distribution network,CROPP still only had 10members. Organic premiumsheld steady at about $2 perhundredweight over theconventional price. And whilelocal lenders were leery of whatwas then a very unproven

market, Wedeberg says that thefarmers “were determined tohang in there and see it through.”(McNair, 1994)

Fortunately, CROPPreceived a grant at this time fromthe Wisconsin AgricultureDepartment’s AgriculturalDevelopment and Diversification(ADD) program. They usedthese funds to improve upontheir label and hire more salespeople. They began showingtheir products at trade showsaround the country, and they alsostarted cutting and wrappingtheir own cheese in their LaFarge headquarters.

Around this time the co-opalso ran a successful equitydrive—members agreed toprovide $11 of equity for each100 pounds of average monthmilk production. (McNair, 1994)We will return to this issue of

equity capitalization at the end ofthis case study, at which pointwe will also consider howCROPP varies from the “newgeneration co-op” model.

Creating a MarketingCompany

Jerry McGeorge is a memberof the CROPP management teamand carries the title ofCooperative Coordinator.According to McGeorge, one ofCROPP’s biggest marketingchallenges early on wasconsumer education. During theco-op’s first few years, therewasn’t any money in the budgetfor consumer education aboutorganics. General publicawareness of the meaning andpurported benefits of organicfood was still quite low, andconsumers balked at the highprices of CROPP’s organic dairy

CROPP Mission Statement

We, the family farmers of Organic Valley, are committed to:

• Cooperatively market the finest in certified organic productsproduced exclusively by our family of farmers.

• Market nutritious, wholesome food as directly as possible to theconsumer.

• Establish farmer-determined prices which provide the farmer withenough profit to sustain his family and his farm.

• Encourage a farming future that emphasizes ecological diversityand economic sustainability.

• Enable a healthy human livelihood by providing qualityemployment, cooperation, organic education, and communitygrowth.

• Practice environmental awareness and cooperative principles inall aspects of production, handling, marketing and operations.

• Promote a respect for the dignity and interdependence of human,animal, plant, soil, and global life.

Sidebar 3: From the CROPP Website: organicvalley.com


products—which were the onlyones on the shelf in most stores.

Nevertheless, McGeorgebelieves that CROPP entered themarket at a good time. Duringthe early-to-mid 1990s, theorganic market really took off,and other companies beganoffering organic dairy products.At that stage, there was plenty ofroom for competitors, andMcGeorge actually believes thatthe new entrants to the marketactually helped CROPP. “Whenconsumers saw that others werecharging prices similar toCROPP, they realized that theco-op wasn’t charging themunfairly.” In addition,McGeorge and Wedeberg bothbelieve that increasing publicconcern about Bovine GrowthHormone (BGH) around 1994helped organic dairy salestremendously.

One of the keys to CROPP’ssuccess is that they neverinvested much money in “bricksand mortar”. Instead, they “co-pack” with 45 different dairyprocessors around the country.

As Wedeberg says, it’s anarrangement works out well forall parties.

Many of the co-processingplants that currently work withCROPP were operating undercapacity when the co-opapproached them to customprocess on their behalf. Thesecheese makers, creameries andbottling plants were willing toadhere to organic processingrules in order to attract the newbusiness.

In 1990, CROPP introducedthe nation’s 1st organic butter,and in 1992, they became theorganic milk supplier forAmerica’s 1st nationallydistributed organic yogurt brand.Between 1995 and 2000, theylaunched several more “firsts” inthe organic industry, includingParmesan cheese, cottage cheese,string cheese, “high heatprocessed” fluid milk, as well asa lactose-free milk.

In the meantime, they alsobuilt up a sizable business inorganic egg sales. And in 1999CROPP launched a second

brand, “Valley Family of Farms”,to market certified organic beef,pork, turkey, and chicken. (Atthat point, USDA rules did notpermit organic meat to bemarketed with the word“organic” in the brand name.)

Currently, approximatelyninety percent of CROPP salesare dairy products, 9 percent areeggs, and 1 percent is meat. Inrecent years, the co-op decidedto market other products likeorange juice, mainly because inmany stores these products aresold in refrigerated casesalongside dairy products, andhaving a wider space on the shelfgives them more exposure to thecustomer.

A big part of CROPP’ssuccess has been its developmentof its primary brand identity:“Organic Valley”. Currently,about 75% of its sales are underthat brand, compared to 7%private label, 11% bulk product,and 7% for manufacturingingredients.

During the mid-1990’s,CROPP grew dramatically. In1993, orders from natural foodstores increased, and by the endof 1994, CROPP handled 2.5million pounds of milk (a 150%increase over 1993) and had 59members. Milk routes expandedto include eastern, western, and

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Map 5: Source: CROPP Co-op

Eggs - 9%Meat - 1%

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Organic Valley Sales by Category

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Chart 4: Source: CROPP Co-op

northern Wisconsin andMinnesota.

CROPP’s customer baseexpanded nationally whencompanies started usingCROPP’s organic milk in theirdairy products. And from themid-1990s to present, both co-opmembership and sales havegrown tremendously. In 2001,CROPP’s sales reached $100million, and 2002 sales areprojected to reach $125 million.Furthermore, it is estimated thattheir products are currentlyfound in some 25-30,000stores, including manyWalmart outlets.

While CROPP’s dairy andeggs sales are going strong, itsmeat sales are not doing sowell at this time. That ispartly because of USDAorganic labeling issues. InOctober 2002, however, newUSDA labeling policiesshould finally allow them toinclude the word “organic”more prominently on theirmeat label, which mayimprove sales.

Impact on Co-op Members

As of March 2002,CROPP had 417 producers—296 dairy producers, 35 eggproducers, 9 pork producers, 28beef producers, 31 vegetableproducers, 4 broiler producers,and 14 citrus producers. Thecitrus producers are under theirown umbrella—only one of themis an official member of CROPP.Producers are located in tenstates: Oregon, California,Minnesota, Iowa, Wisconsin,Illinois, Vermont, New York,Pennsylvania, and Florida.

Most CROPP farmers areconsidered small to medium-sized—although classificationsvary depending on the region.The average herd size forCROPP dairy farms is about 50cows, but herd sizes range from20 cows to as many as 400.CROPP includes very fewdairies on the high end of thisrange—most of which arelocated in California and thePacific Northwest. Bycomparison, in 2000, 12 percent

distributing premiums in themilk checks every two weeks.

Not only is this a variation ofthe more traditional co-ops,which often retain 70-80% ofprofits each year in order to buildequity, but it’s a variation fromthe new generation co-ops too,which typically pay market ratesfor farmers product upondelivery, and wait until the endof the year to distribute profitsback in the form of a “valueadded check”. CROPP members

3/02

Chart 6: Source: CROPP Cooperative


of dairy farms nationwide had 50or less cows, 22 percent hadbetween 50-100 cows, 35percent had between 100-500cows, and 31 percent had over500 cows. (USDA, 2001)

Members benefit financiallyin three ways. First andforemost, they receive significantpremiums for their organic milk.CROPP has essentially made adecision to transfer itsprofitability back to its memberson an on-going basis, by

insisted that they receive largermilk checks up front.

CROPP’s “pay prices” areprobably the number one reasonmost dairy farmers joined the co-op. Essentially the dairymembers collectively set the payprice based on their costs ofproduction. As a result,throughout the 1990’s and up topresent, CROPP farmersreceived milk checks thathovered substantially aboveconventional prices.

In 2000, for example, theOrganic Valley price was$17.18, which, they reported,was $6.61 over the conventionalprice of $10.57. (See Chart 7below. Data for conventionalprices was provide by CROPPand was not verified by UWCC.)In 2001, they reported thatconventional prices rose to$13.74, while CROPP pricesremained steady at $17.53. Forfarmers, the stable pay pricesthat CROPP maintains are awelcome relief in a relativelyunstable farming environment.

The second way thatmembers benefit involves aCROPP policy of paying theirmembers 8% interest on theirequity investment. This is quiteunusual in the co-op sector.

Finally, members also benefitfinancial from a relatively fastreturn of their retained (non-direct) equity investment. (Theirdirect equity investment is not

returned until they retire.) Thestate CROPP policy is to returnmembers’ retained equity on aseven-year cycle. If true, thiswould be a fairly quickturnaround compared to manytraditional co-ops, which maytake fifteen tot twenty-five yearsto revolve back equity.

There are many otheradvantages to CROPPmembership in addition to goodpay prices. As with all co-ops,CROPP members are owners ofthe organization. Mostimportantly, according toWedeberg, even as the companygrew from “seven farmers sittingaround a table” to a largeorganization, it built in ways tomake sure that members couldparticipate in the decisions of theorganization if they wanted to.

Farmers still have a lot of sayin determining pay prices,marketing strategies, and otherorganizational decisions. The

Board of Directors is active andfarmer-controlled. All of theproduce categories are groupedinto producer pools, and eachpool meets monthly to makedecisions. Each region elects arepresentative to make sure thatconcerns of farmers in thatregion are heard by the CROPPmanagement team.

Overall, CROPP producersinterviewed for this study werevery pleased with theirexperience of the cooperative.All of the farmers (4 dairyproducers and 1 egg producer)were already organic when theyjoined CROPP, but were gettingconventional pay prices and werehaving a hard time making itfinancially. CROPP gave themhigher pay prices and did themarketing work that they did nothave time or background to doon their own.

All five farmers interviewedcame into the program with a

Chart 7: Source: CROPP Cooperative. Data for conventional prices was provide by CROPP and was notverified by UWCC.



strong commitment to organicfarming and sustainableagriculture. Jim Grimm, aWisconsin dairy farmer with 45cows, said that he joined CROPPin 1993 after farming organicallyon his own for about thirteenyears. He said that even thoughmost of the farmers in his areawere conventional farmers whojust “went with the group”, he“always knew that organic wasthe right thing for the soil and forthe animals.”

Joe Placke, anotherWisconsin dairy farmer with 70cows, joined CROPP four yearsago after farming organically forabout six years. Like Grimm, heswitched from conventionalwhen he decided that he “justdidn’t want to use chemicalsanymore” because he felt thatorganic was “healthier for thepeople and the animals.”

Duane Bushman runs an eggand dairy farm in Iowa alongwith his three sons; altogetherthey have 140 dairy cows andbetween 18,000-20,000chickens. Bushman had an evenmore personal reason forswitching to organic. In 1982, abag of insecticide broke in hishands, and he later got a braintumor that, in his opinion, isconnected to exposure to theinsecticide.

Bushman marketed hisorganic products on his ownuntil the early 1990’s, whenCROPP began their eggprogram. He expressedparticular concern about theoveruse of hormones in animals,calling it “one of the saddestthings about conventionalcommercial herds.”

Jim Grimm, similarlyclaimed that his own cows live to

about 13 years, whereas on thebig conventional farms, animalslive much shorter lives. Bothfarmers believe that the qualitytreatment of animals is one ofCROPP’s most importantrequirements, and one thatcontributes greatly to the highquality of CROPP’s products.

Beyond their firmcommitment to organicproduction, the farmersinterviewed all felt that CROPPmembership was helping themsurvive financially. Joe Packesaid that the “biggest thing is thatCROPP helps me get a betterprice for my milk.” Bushmanstressed that alone, farmerscannot make it in the organicniche market, but farmersworking together throughCROPP can hold a significantportion of the organic marketand make a profit.

Bushman said that heappreciates the stable pricingCROPP offers for his eggs andmilk, and the fact that CROPP“makes sure profit goes intofarmer, not into the co-op.” JimGrimm said “if it wasn’t forCROPP, I’d get out of it.” (Thechallenge of balancing pricespaid to members with the equityneeds of the business can be anAchilles heal of cooperatives.This will be discussed further inthe conclusion.)

Busman described neighborswho were desperately trying tocompete with the bigger farms—growing from 100 or fewer cowsto 500-600 cows—but neverquite able to keep up. Many ofthem, Grimm said, “don’t evenown their farms and probablynever will.” Several otherfarmers described similarscenarios in their areas.

Several farmers mentionedthat they were pleased withCROPP’s organizationalstructure and producer pools,because they encourage activeinvolvement and give farmersmore voice in decisions made bythe organization.

Growing PainsDespite the affirmative

attitudes of CROPP membersand the upward trend in thecooperative’s gross sales, majorchallenges lie ahead. BothCROPP farmers and managersexpressed concerns related to thegrowth of the co-op and thepressures of outside competition.

Some of the farmersinterviewed (who wished toremain anonymous) expressedconcern about how theincreasing size of theorganization would affect farmerparticipation and their voice inorganizational and marketingdecisions. Moreover, to handlemarketing and sales, CROPP’sadministrative staff has grown toabout 200—about one-half thenumber of farmer members.Most of these employees are notfarmers, and have been trained inconventional marketing. A fewfarmers expressed concern thatthese employees might not becommitted to the co-op’s centralmission.

As CROPP’s sales levels andnational recognition grow,farmers from around the nationare joining the organization. Onefarmer said he was concernedabout commitment andexperience of some of thefarmers joining the CROPPbandwagon, and moreimportantly, the quality of their


products. As he said, “peoplewho aren’t true farmers, a lot ofthem from out East, are joiningCROPP. These people couldgive Organic Valley a lot ofproblems.”

For example, he has seennew CROPP members who werenew to egg production make baddecisions about feed and causeCROPP egg quality andproduction levels to go down.These bad decisions, he says,affect everyone in the eggpool—and ultimately everyonein the co-op. He felt strongly thatone of CROPP’s challenges asthey grow will be to “identifywho is a farmer…the people whogive us trouble are people arearen’t real farmers.”

Several farmers said thateven though they were verypleased with their pastexperiences in CROPP, theywere a bit worried aboutCROPP’s current direction.More specifically, they weren’tconfident about the co-op’sdecision to “go big” and competewith the other major players indairy and organic foods. As onefarmer said: “As we get bigger,we try to compete with all theother products out there...everyone thinks we need to haveit all. We’re trying to get biggerthan Horizon. But that’s notnecessarily where the farmerswant to be.”

Moreover, a few farmersexpressed concern that as theorganization and administrativestaff grow, they are becomingless able to address the widerange of concerns of the farmers.The co-op increasingly dependson newsletters to communicatewith its hundreds of producers,and as one farmer stated,

“farmers become removed fromwhat’s happening inmanagement.” Newsletters, headded “only tell us some of thestory, the part the managementwants to tell, and other things arehidden…they feed everyone thesame information.” He addedthat even though meetings andother decision-making processeswere open to farmers, agendasfor the meetings were often setbeforehand by management.

CROPP management isdefinitely aware of thechallenges that have come withgrowth and success. They seemparticularly concerned today

with increased competition andthe limitations of their capitalbase.

Jerry McGeorge sayscompetition is certainlybecoming more acute. When theco-op first started, there wereonly a few other regional playersin the market– such as BrownCow, which captured a largeportion of the northeastern U.S.market.

Today, CROPP’s numberone competitor is Horizon, aprivate firm that entered themarket about the same time as

CROPP, but focused onmarketing fluid milk andeventually became the leader inthat category. Horizon nowcontrols about 50% of thatmarket, compared to 35% forCROPP.

Buyouts by big dairycompanies are also becomingmore common, intensifyingcompetition in the dairy market,and making it difficult forconsumers to know who isproducing and processing theproduct they purchase. Theentrance into the organic marketby companies like Suiza (whichrecently merged with DeanFoods, which itself owns a 12%stake in Horizon) has furtherintensified competitivepressures.

A “Hybrid” New GenerationCooperative

Before considering CROPP’sstrategies to deal with its capitallimitations, we will first return tothe topic of “new generationcooperatives, or NGCs, andexplain how CROPP represents a“hybrid” version of that model.

At first glance, it mightappear that CROPP reveals noneof the four structural traits ofNGCs. Farmers are not requiredto make “up front” investments,but rather portions of their milkchecks go toward their equityaccounts until they meet theircommitment.

Furthermore, CROPP doesnot utilize “capital shares” likemost other NGCs. Shares arenot traded, they don’t change invalue, and they don’t obligate aproducer to deliver a set quantityof raw product. Lacking all of

CROPP members shown in theirpromotional literature.


these traits, how can the co-op beconsidered a hybrid NGC?

One reason is that CROPP isessentially a closed co-op, whichis a key feature of NGCs. Newmembers are taken on only asdemand for organic milkincreases. Furthermore, currentmembers only receive premiumprices for milk that is sold intoorganic markets. (Currentlyabout 98% of the co-op’s milk issold as organic.) Matchingsupply to demand is an essentialcharacteristic of new generationcooperatives.

And while CROPP membersmay not have made their equityinvestments “up front”, since1988 they have made significantcapital contributions. Some ofthe larger members have up to$90,000 invested in the co-op.

CROPP members currentlycontribute capital to their co-opin two ways. First, there is the“direct equity” investment,which requires that everymember make an equitycontribution equivalent to 5½percent of their annual incomefrom CROPP. (This can be paidall at once or more typically issubtracted from the milk checkuntil the obligation is met.) Thatmeans that as their production

and income grows year-to-year,their capital requirement alsoincreases, and they must paymore into their equity account.

Members also contributeequity in the form of “retainedpatronage refunds”. When a co-op is profitable, the board ofdirectors has the option ofreturning some or all of theprofits back to the members incash at the end of the year,distributed in proportion to eachmember’s patronage.Alternatively, they may retainprofits and allocate them tomembers’ equity accounts, to be“revolved” back at a later date.Finally, the board may choose toretain profits but not allocatethem to individual members.The latter equity essentiallybecomes common property, andwill stay with the co-op until itdissolves.

Another feature of NGCs thatis often sited is their orientationtoward meeting market demandin order to achieve profitability.Certainly many of the oldergeneration of agriculturalmarketing co-ops would alsoclaim to fit that description. Butmost traditional co-ops acceptunlimited supplies of rawproduct and then figure out what

to do with it, often accepting lowprices from buyers and passinglittle or no profit back to theirmembers.

The theory behind newgeneration co-ops, on the otherhand, is to limit supply to matchdemand, and often they targethigher value markets in order togenerate profits that can then betransferred back to the membersin cash as quickly as possible.

CROPP is certainly market-oriented. Bedessem explainedthat they are not a production co-op, in the sense that they do notfocus on “moving” raw product.Nor are they a processing co-op,focused on turning milk intocheese and other dairy products.Instead, they can best bedescribed as a marketing co-op,focused almost entirely ongetting their “Organic Valley”branded products intoconsumers’ refrigerators. Theyinvest approximately 14% oftheir earnings each year intopromoting their brand.

Finally, the fact that CROPPhas been able to transfer itssuccess back to its memberswould further establish them as anew generation cooperative. Avisit to their modest headquartersin La Farge, Wisconsin is an

From the packaging of Organic Valley products


indication that cooperativeprofits are not being divertedunnecessarily from where theyreally belong: back in theirmembers’ pocketbooks.

ConclusionRecent years have been

exceptionally good to CROPPand its members. The obviousquestion is how long will thegood times last? It will certainlynot be easy to compete in themarket with larger players likeDean Foods. As members andmanagers have expressed, thechallenge before CROPP now iswhether and how it can continueto compete without forfeiting itscommitment to family farmprofitability.

Essentially, they are facing aproblem that is commonthroughout much of theagricultural co-op sector,namely, how to compete withprivate firms who have fewerrestrictions on access to capital.There is only so much moneythat a group of farmers canafford to invest off their farms.

A related challenge forCROPP, and for mostagricultural co-ops, is the need torevolve equity back to themembers. CROPP memberscurrently have about $5.5 millionin equity invested in the co-op. In recent years, about 20% of theco-op’s profits have been used torevolve back the members’retained equity. To continuetheir present rate of revolvement,CROPP must maintainprofitability.

But for CROPP to stayprofitable, it needs to remaincompetitive, and that willundoubtedly require new capital

investment. A major constraintis that their current and incomingmembers cannot supply capitalas quickly as it’s needed.

Another option, whichCROPP does not appear to beconsidering, is to lower theprices that they pay for theirmembers’ milk. High pay pricesare what attracted manymembers to the co-op and toorganic production practices.However, there is a balance thatmust be achieved. If high pricesare paid to farmers now, whileneglecting to position the co-opto be competitive in the future,then the gains now could turninto tragic losses down the road.In the past year, severalsignificant bankruptcies amonglong standing co-ops haveoccurred at least in part becausethis delicate balance was notmaintained.

Rather than lower pay prices,CROPP is currently reexaminingits approach to equity andcapitalization. One option on thetable is to end the policy ofpaying interest on members’equity. This policy is relativelyrare in among farmercooperatives, and those interestpayments could go insteadtoward capitalizing the co-op.Nevertheless, discontinuing theinterest payments would be aclear retraction of memberbenefits.

CROPP is also in the processof getting a 521 IRS exemptionso that it can meet therequirements of the Security andExchange Commission (SEC).This will facilitate the sale ofpreferred stock to the generalpublic.

As stipulated by Wisconsinstatutes, an 8% limitation on

dividend payments to preferredstock would still apply. Also,these preferred shareholderswould no voice in thegovernance of the co-op, withthe exception of decisions thataffect the value of the stock(mergers, dissolution, etc.)

The limits on dividends andvoting power would typicallyturn off many investors.However, Bedessem says thatthere is substantial support forthe company among consumersin Wisconsin and nationwide,and CROPP hopes to raise asmuch as $2-3 million from salesof preferred stock.

Other agricultural co-opshave turned to additionalcapitalization strategies in recentyears. Some establish jointventures with investor-ownedfirms, which usually requires anabdication of some control overthe shared enterprise. Onenotable new generation co-op inNorth Dakota went so far asconverting to a privatecorporation.

There seems to be noindication that CROPP isconsidering such strategies. Aslong as they maintain theircurrent level of profitability, theywill have some flexibility toconvert profits into much neededequity capital. But as theorganic industry becomes morecompetitive, that will be harderto do.

It would seem that themembers of CROPP are facing acritical juncture in the evolutionof their cooperative. Together,they have been part of somethingvery successful, watching theirsales grow to phenomenalheights over the past fourteenyears. Where they go from here


will depend a lot on the growthof organic markets and theactions of their competitors.They must identify where theywill fit best within that

marketplace. They mustmaintain a sufficient level ofcapitalization to compete there.Hopefully, they can accomplishthose goals while staying true to

the mission and the principlesthat got them where they aretoday.

2003 Update: On December 30, 2002, a CROPP press release reported 2002 sales surpassed $125million. They are projecting sales of $212 million by 2005. They report that the organic industry is stillgrowing steadily at 20%, driven in part by organic milk sales, which are growing at a rate of 27%.CROPP continues to ride this wave of growth with their Organic Valley brand of food products.

Ninety-four new farms joined the CROPP family in 2002, increasing their national membership to over500. Their members brought 94,000 more acres into organic production in 2002, for a total of 75,000acres. 3,810 cows were added to their system, for a total of 17,800 cows.

CROPP CEO George Siemon reported that in November 2002 CROPP members in Wisconsin received apay price of $20.02 per hundredweight, while the conventional price, as they reported it, was about $11.

Competitive pressures, of course, have not lessoned, and the co-op still faces the fundamental challenge ofmeeting their capital needs in order to remain competitive and profitable in the future.

Meanwhile, the Wisconsin Federation of Cooperatives and the Minnesota Association of Cooperatives areeach working in their respective states to create new co-op legislation. Modeled after a new Wyoming co-op statute, the new co-op laws, if passed, should make it easier for co-ops to attract outside (non-farmer)capital. In exchange for the flexibility on capital acquisition, farmers will forfeit some degree of controlas well as a share of any profits the company earns.

Reorganizing a preexisting co-op like CROPP into the new co-op structure will probably involveprohibitive tax penalties. However, the new state laws, which would essentially create a modified limitedliability company (LLC) with a co-op name, may be the best option for farmers who are looking to startnew ventures but lack sufficient capital to do it entirely on their own.

REFERENCES

Green, Catherine, “U.S. Organic Agriculture Gaining Ground. Agricultural Outlook. EconomicResearch Service/United States Department of Agriculture. April, 2000.

Greene, Catherine, Dimitri, Carolyn, & Richman, Nessa. “Organic Marketing Features Fresh Foods andDirect Exchange.” Food Review. Volume 24, Issue 1. January-April, 2001.

McNair, Joel. “Wedebergs Worked Hard to Get $17 Milk.” Agri-View 1994

Myers, Steve and Somlynn Rorie, “Facts and Stats: The Year in Review.” Organic & NaturalNews.December, 2000.

________. U.S. Department of Agriculture, National Agricultural Statistics Service, Dairy and PoultryStatistics. 2001.

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