ruralcoop may06 post-print · p. 17 p. 22 features 4 chs at 75: looking back, looking forward by...

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lCOOPERATIVESCOOPERATIVESUSDA / Rural Development May/June 2006

CHS: 75 and Still Shiningpage 4

CHS: 75 and Still Shining

On July 2, 1926, President Calvin Coolidge signed theCooperative Marketing Act into law, formally launching thefederal government’s role in assisting farmer-owned coopera-tives. Although USDA first assembled data on farmer co-opsin 1901 and launched its first official cooperative project in1912, it was the 1926 Act that really got the show on theroad. The first of the program’s subsequent “homes” was theDivision of Cooperative Marketing within USDA’s Bureau ofAgricultural Economics. For six years in the 1930s, it waseven housed in the Farm Credit Administration beforereturning to USDA.

Rather than a regulatory program, the framers of the lawenvisioned it as a program that would provide education,research and technical assistance to help farmers help them-selves. Eighty years later, this mission continues, althoughMr. Coolidge and Co. would certainly be amazed by the radi-cal transformation of the nation’s rural (and urban, for thatmatter) areas. The number of farmers is, of course, greatlyreduced, and the size of the average farm has greatly expand-ed. But the marketing and other challenges facing farmers aremore formidable and complex than ever, and hence the per-formance of their cooperatives is still vital.

To see how a co-op can evolve and grow along with thefarm economy, just turn to the coverage on page 4 of thisissue to read about CHS Inc. as it marks its 75th anniversary.The history of CHS and its predecessor co-ops is, in manyrespects, also the history of agriculture and co-ops in theMidwest and Northwest.

Examples of innovative medium and small size co-ops are,of course, also featured in every issue of this magazine anddemonstrate how flexible the co-op model is. Strategicalliances and joint ventures among co-ops, new-generationco-ops, use of co-op subsidiaries, co-ops with internationalmembers and using outside equity to supplement farmers’equity are examples of this flexibility. Co-ops are industryleaders in identity preservation, niche marketing, develop-ment of new products and services and other ways of provid-ing member support.

Despite the passage of 80 years, the scope of activitiesCongress directed USDA to help farmers pursue through co-ops still serves as a road map to the types of endeavors farmerco-ops are engaged in today. The Act directed service to beprovided to associations, federations and subsidiaries of agri-

cultural producers “engaged in cooperative marketing of agri-cultural products, including processing, warehousing, manu-facturing, storage, cooperative purchasing of farm supplies,credit, financing, insurance and other cooperative activities.”

The Act has seven subsections, which direct the followingactivities to be undertaken:• Promoting knowledge of cooperatives principles and prac-

tices and cooperating with educational and marketing agen-cies, cooperatives and others in promoting that knowledge;

• Making special studies in the United States and foreigncountries and acquiring and disseminating information andfindings useful in the development and practice of coopera-tives;

• Gathering, analyzing and disseminating economic, statisti-cal and historical information about cooperative businessmethods;

• Studying economic, legal, financial, social and other phasesof cooperation and publishing the results;

• Surveying and analyzing accounts and business practices ofcooperative associations...and publishing summaries ofresults to guide other cooperatives in developing methodsof business and marketing analysis;

• Advising committees or producer groups seeking to organ-ize a cooperative and making an economic analysis...

• Employing qualified commodity marketing specialists tosummarize and analyze the information and disseminate itto cooperatives and others.

After 80 years, should the Act be updated? Some have sug-gested expanding the scope to include all types of coopera-tives, not just agricultural cooperatives. Should the role of theprogram – now housed with USDA Rural Development – beexpanded to include other types of producer-owned agribusi-nesses (such as the producer-owned LLCs gaining popularityin the biofuels industry)?

These and other questions and issues concerning thefuture of producer-owned and other types of cooperativeswill need to be resolved as co-ops position themselves to pro-vide the types of services their members need in order toprosper. ■

— Dan Campbell, Editor

2 May/June 2006 / Rural Cooperatives

C O M M E N T A R Y

80th Anniversary of Cooperative Marketing Act

Rural Cooperatives / May/June 2006 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 $23 per year. Postmaster:send address change to: Rural Cooperatives,USDA/RBS, Stop 3255, 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 U.S. Department of Agriculture (USDA) prohibitsdiscrimination in all its programs and activities onthe basis of race, color, national origin, age, disabili-ty, and where applicable, sex, marital status, familialstatus, parental status, religion, sexual orientation,genetic information, political beliefs, reprisal, orbecause all or part of an individual’s income isderived from any public assistance program. (Not all prohibited bases apply to all programs.) Personswith disabilities who require alternative means forcommunication of program information (Braille,large print, audiotape, etc.) should contact USDA’sTARGET Center at (202) 720-2600 (voice and TDD). To file a complaint of discrimination, write to USDA,Director, Office of Civil Rights, 1400 IndependenceAvenue, S.W., Washington, D.C. 20250-9410, or call(800) 795-3272 (voice), or (202) 720-6382 (TDD). USDAis an equal opportunity provider and employer.

Mike Johanns, Secretary of Agriculture

Thomas C. Dorr, Under Secretary,USDA Rural Development,

Jack Gleason, Acting Administrator, Rural Business-Cooperative Programs

Dan Campbell, Editor

Vision Integrated Marketing/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.

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COOPERATIVESCOOPERATIVESMay/June 2006 Volume 73 Number 3

p. 4

p. 14

p. 17

p. 22

F E A T U R E S

4 CHS at 75: Looking back, looking forwardBy Dan Campbell

12 Montana forest fuel collection business wins USDA grantBy Tyler Christensen

14 Bottling Hope in AfricaLand O’Lakes providing boost to Ugandan dairy industryBy Todd Thompson

17 Co-op ConversionsExtent of commitment to co-op values key factor in decisions By Julie Hogeland

22 A Movable FeastN.D. farmers to add value and educateconsumers with D.C. eateryBy Sheri Aldapi

24 Agri-Mark, Allied Federationdairy co-ops join forces

D E P A R T M E N T S

2 COMMENTARY16 VALUE-ADDED CORNER21 LEGAL CORNER25 NEWSLINE33 PAGE FROM THE PAST35 INSIDE RURAL DEVELOPMENT

O n t h e C o v e r :

On the Cover: Looking a little like flickering birthday cake candles, isCHS Inc.’s petroleum refinery at Laurel, Mont., one of its two refineries.CHS leaders look at the past and future of the co-op on its 75th birthday.Photo by David Lundquist, courtesy CHS

By Dan Campbell, editor

e-mail: [email protected]

taying power. That’s what it takes for any busi-ness to survive and thrive for 75 years.

CHS Inc. is observing its 75th anniversarythis year as much more than just a survivor. It isa diverse and growing Fortune 200 agribusiness

with $11.8 billion in annual sales. It serves 1,100 local coop-eratives with 325,000 member-producers and is poised topursue promising new industries.

The success of CHS is testament to the power of what aproducer-owned agribusiness can accomplish with the rightbusiness strategies and the support of its members. From thefuels it refines and supplies to member cooperatives, to thegrain it mills into flour and the oilseeds it processes into veg-etable oil-based foods, CHS strives to make sure producers

get the supplies they need to produce a crop, then adds valueto those crops to help return more farm dollars to producersand their communities.

CHS predecessor co-ops were founded during the GreatDepression, when farming was literally a life-or-death strug-gle for local co-ops and their producers. Farmers — then asnow — looked to their co-ops as crucial business partnerswhose success or failure was inexorably linked to their own.The nation’s newly mechanized agriculture industry wasincreasingly looking for a dependable, fairly priced source offuel. Farmers also needed strong cooperatives to get theirgrain to market and to return a good price for it.

Cenex (or Farmers Union Central Exchange) was estab-lished in St. Paul, Minn., in 1931 to supply farmers with fueland other vital farm supplies. For grain handling, farmersformed North Pacific Grain Growers Inc. (NPGG) in 1929in Lewiston, Idaho, and Farmers Union Grain Terminal


CHS at 75:Look ing back, look ing fo rward

S

CHS at 75:Look ing back, look ing fo rward

Association (GTA) in 1938, also in St. Paul. These are thethree “rootstock” co-ops from which CHS sprouted.

NPGG and GTA merged to create Harvest StatesCooperatives in 1983. Harvest States in turn merged withCenex in 1998 to create CHS Inc. (The 1931 founding ofCenex is being used as the official birth date for the com-bined organization.) There have been many other mergerswith smaller co-ops along the way (see the CHS Milestones,page 8) as the co-op has grown and evolved to meet thechanging needs of its members and the marketplace.

In a wide-ranging discussion with Rural Cooperatives inearly April, CHS Chief Executive Officer John Johnson andBoard Chairman Mike Toelle, a producer from Browns Valley,Minn., talked candidly about the past andfuture of CHS, and what its continued suc-cess means to their members and ruralAmerica.

Q. What lesson should we derive from thefact that CHS has lasted for 75 years?

Mike Toelle: The basic business philos-ophy that has helped us through 75 yearsof success is the same one that is impera-tive as we move into the future. Really, it’svery simple: always focus on the organiza-tion as a whole and make the best deci-sions for the co-op and its members. Thisrequires a disciplined approach in the deci-sions you make in the board room. Youmight not be able to solve all the problemsof your members, so you need to focus onthose issues that you can address, position-ing the co-op to provide the most value

back to the members. We operate on the co-op business model, which facilitates

CHS in returning more value to our members. One measure-ment of that: in 2006 we returned $151 million in cashincluding patronage and equity redemptions — a record.That is another type of added value that flows back to ourmembers and their communities from this cooperative.

Q. CHS has grown through mergers, perhaps the biggest beingthe Cenex-Harvest States merger. What factors made that a goodfit, and what were the biggest problems to be resolved to make itwork?

John Johnson: “The process started in late 1997 and con-cluded in June of 1998. Therewas about a 90-percent overlapin the membership of the twocompanies. When we looked atthe future of agriculture, itbecame pretty clear to us thatintegration between the supplyside of the business and the mar-keting and processing side wouldbe in the best interest of produc-er-farmers. Leadership — boardsand management — endorsedthe vision for coming together.

Some mergers don’t work, butthis had a lot of strategy behindit and alignment with leadership.All the stars lined up to create avery successful merger. Fromthere, it was all about executionof the strategy. The two CEOs— Noel Estenson at Cenex andmyself at Harvest States — weretotally aligned regarding what wehad to get done to organize the

new company. We divided the duties — Noel tookon more of the political and board work, while Itook on more of the operational aspects. This gaveus the focus we needed to execute the merger in arelatively short period of time, with very few hic-cups.”

Q. Some of your local co-ops have grown substantial-ly in recent years, some even attaining the designationof “super local” with $300 million or more of salesannually. How does this change the role of CHS inmeeting their needs?

Johnson: “Consolidation on the retail side hasbeen ongoing and probably has accelerated in thelast 5-6 years, resulting in some “mega” local co-ops. The unification of Cenex and Harvest Statesreally helped us become a better provider of sup-plies and marketing to them. Size and scale


Transporting members’ grain to market by river barge, trucking farm supplies tolocal co-ops and providing on-farm fuel delivery are just three of the many servic-es CHS performs for its members. All photos courtesy CHS

become very important when we serveco-ops of that size. The merger ofCenex and Harvest States was anenabler for a lot of other co-ops to con-sider mergers. A lot of co-ops that werepurely supply or purely marketing havebeen able to unify their efforts tobecome an integrated supply and mar-keting co-op, just as we have done.”

Toelle: “On the supply and outputside of the business, when we put Cenexand Harvest States together, we lookedat them as complementary businessesthat would be better poised for thefuture of agriculture as one co-op. Ibelieve that is what also happened atthe local co-op level.”

Q. CHS has taken over direct manage-ment of some local co-ops that were strug-gling. How has that been working out?

Toelle: We’ve not only taken oversome challenged co-ops and retail loca-tions, but in many cases local producershave simply decided to merge withCHS to gain added efficiencies from itsadministrative and support services.Their equity is now directly in CHSrather than in their local association.We call these CHS Country Oper-ations, and it has worked very well.

They still operate just like a tradi-tional local co-op, with a local boardand governance and local management.That said, this model is not for every-one. Some people really like it — it hasbeen particularly popular in Montana.But others want more independence.

There has been slow but steadygrowth in the program. More requests

come in every month; some of themhappen, some don’t. Many co-ops need-ing to make a change in their businessstill decide to merge with a largerneighboring co-op down the road andremain a part of CHS through theirlocal. What CHS is offering is owner-ship options. Local producers have todo the research and make a decisionbased on what best serves the interestsof their producers.

Q. The biggest co-op failure in historyoccurred a few years ago when FarmlandIndustries collapsed. What lessons did youdraw from that tragedy?

Johnson: “Don’t ever let it happen!It was an absolute shame. It comes downto some very sound principles of run-ning your business. Some people havethe idea that it failed because it was aco-op. That is furthest from the truth.Really, it was due to business failures ina company that was driven very heavily

by size — dollar sales volumemeant everything to Farmland.They leveraged their balance sheetto accomplish that objective, thengot into some business cycles thatwere disastrous for them.

We want to grow, but to growon a profitable basis. Our disci-pline is to make sure our balancesheet stays strong, which meansthe relationship with our bankersremains strong. This enables you toride-out business down-cycles.Farmland got heavily leveraged over theprevious 10 years. Then, when a badcycle hit — in their case it was fertilizerand petroleum that were really in thetank — they didn’t have the wherewith-al to get through it.

There is also a business culture issue.We have a philosophy to undersell andoverdeliver. You should try to createrealistic expectations, whether withyour owners or bankers. Farmland hada culture that would lead members andbankers to believe that they were goingto achieve all these fantastic results, andthen never achieved them.

Again, I’m a firm believer that itwasn’t their co-op business model thatcreated their failure, but it was somebusiness decisions that they made in the10-year window prior to their failurethat caused it.”

Q. How aggressively has CHS been ableto move into Farmland’s former trade ter-ritory, especially in places such as Kansasand southern plains states?

Johnson: “Big time! It is our highest

“We’re doing what the market is demanding: pro-ducing more energyproducts… as well as reinvesting in renewable fuels.”


growth area, for both farm supply andgrain, although farm supply is growingeven faster. Farmland’s failure createdan absolute void — from a co-op pres-ence perspective — in those markets.Some of those co-ops were findingother partners during that time, privatecompanies that stepped in there andcreated alternatives for them. We had

been there for a long time, but we thenreally stepped-up efforts to provide aco-op solution for those local co-ops.”

Q. Have you encountered much anti co-op fallout, with producers saying: “We don’twant to deal with any more co-ops?”

Johnson: “I don’t think so. There isstill a very strong co-op philosophy in

those markets. Butthere is more of a“show me” attitude.Union Equity alsofailed in that area,and then Farmlandcame in and eventu-ally failed. So thereis a track record ofregional co-ops therenot being successful.But they were stilllooking for a co-oppartner. We havedemonstrated that

we can deliver what we say; and there’sa lot of security around our equity andequity-revolvement plan.”

Q. Petroleum has been the biggestincome earner for CHS in recent years.What is the outlook for that part of thebusiness, and are there any plans to expandrefinery capacity or acquire oil reserves?

Johnson: “We hold no oil reserves— we are purely a refiner and marketer.We buy crude oil from outside, bothdomestically and globally.

Most of our business units have beendoing quite well, many having hadrecord years. But you’re right, our earn-ings the last few years on refining mar-gins have been at points we’ve neverseen before in our history. We’ve rein-vested back in these plants. We’ve madesulfur-reduction upgrades at both of ourrefineries — at Laurel, Mont., andMcPherson, Kan. We’ve spent about$400 million doing that and, in the

CHS’ Venture Foods subsidiary, one of the nation’s leading proces-sors of oil-based foods, has returned more than a 30-percentreturn on equity since formation in 1996. Opposite page: CHS CEOJohn Johnson, left, and Board Chairman Mike Toelle.

CHS Inc. is a diversified, federated cooperative in theenergy, grains and food products businesses. It had 2005sales of $11.8 billion and net income of $250 million. Ithas 6,370 employees. CHS is owned by farmers, ranchersand local cooperatives from the GreatLakes to the Pacific Northwest, from theCanadian border to Texas.

Major business divisions include:• Grains — CHS markets more than 1

billion bushels of grain annually in 60countries, making it the nation’s largestcooperative grain handler. It operatesmany grain terminals and retail facili-ties.

• Foods — CHS is a leading processor ofvalue-added foods. Its Ventura Foods,LLC (with partner Mitsui & Co.) is aleading manufacturer of margarines and butter blends,salad dressings, sauces and vegetable oils. HorizonMilling (a joint venture with Cargill) is the nation’s lead-ing flour miller and supplier of durum wheat. CHSOilseed Processing refines more than 1 billion poundsof soybean oil annually. CHS Sunflower serves morethan one-third of the domestic kernel and in-shell mar-ket and export markets.

• Energy — CHS is the nation’s largest cooperativegasoline and diesel refiner and a significant whole-

saler and reseller of refined fuels. The Cenex conven-ience store chain is one of the nation’s 20 largest, andit is the fifth largest propane retailer and produces awide range of lubricant products. It operates refineries

and pipelines, has its own truck fleetand is now one of the largest suppliersof ethanol-enhanced gasoline and mar-kets of biodiesel. • Agronomy — Through Agriliance LLC, a

joint venture with Land O’Lakes, CHSmarkets crop nutrients and protectantsto producers through local coopera-tives and independent dealers in theUnited States, Canada and Mexico.

• Country Operations — CHS operates300 local farm supply and grain facili-ties, providing ag inputs, grain market-ing and other supplies and services.

• Business solutions — CHS is a full-service brokerageand risk management provider through its subsidiary,Country Hedging Inc. and its 60-some branch offices.Through Ag States Group, it offers insurance and groupbenefit programs; it provides business consultationservices to 1,400 local co-ops.

• Animal nutrition — CHS supplies livestock feed andservices from the Central U.S. to Pacific Northwestwith Payback brand feeds.

CHS: a snapshot


process, we also got rid of some bottle-necks to improve capacity.

Now we’re spending $325 million atLaurel, Mont., on a coker — a bottomrefiner that converts asphalt into morerefined fuel products. It will increasecapacity of the plant by about 14 per-cent.

We’re also taking a lot of the moneythat we’ve been earning and reinvestingit in renewable fuels. We’ve investedabout $70 million in a renewablefuels/ethanol production company. Bythe end of 2007, it will have an annualcapacity of about 550 million gallons,making it the second largest ethanolproducer in the United States. So, we’redoing what the market is demanding:producing more energy products anddoing it by tweaking current plants forextra capacity, as well as reinvesting inrenewable fuels.”

Q. Any plans to increase your 28 percentshare in ethanol producer U.S. BioEnergy?

Johnson: “Our share floats around abit. Since making our investment inNovember 2005, they have added anumber of locally organized co-ops thathad been building ethanol plants, andhave now merged into U.S. Bioenergy.With the last round of mergers, ourownership dropped down to 24 percent,so we invested another $35 million ofcapital into the business. Now we are a24-percent owner of a much largercompany than when we had 28 percentof it. I expect to stay stable there for thenext year or so.”

Q. Is biofuels hurting some of your localgrain co-ops by taking away corn volume?

Johnson: “I wouldn’t say that it’s likea loaded gun to their heads, but it ishurting some. Ethanol is now eating upas much corn as the export market. Andthis is a phenomenon that has happenedin just the last five years. So a lot ofgrain facilities that typically handled ahigh volume of grain for export are

finding corn instead going for ethanol. From our perspective, and that of a lotof our locals, there are two sides of thebusiness: one is grain export, the otheris domestic demand for grain, as well asfarm supply. That diversification at thelocal level will give them tremendousstaying power going forward. The mar-ket is telling us it wants more corn pro-duction. This year the numbers didn’tcome out like I thought. But there is alot of new seed genetics technology thatwill expand corn production — maybein geographic areas where we don’tgrow a lot of corn today.”

Q. Does biofuel compete with CHSpetroleum?

Johnson: “They tie together verywell. There is some uniqueness therefor CHS. We probably are one of theonly ethanol producers that areinvolved in fossil fuels refinement. Weare also the only fossil-fuel refiner thatis directly involved in ethanol produc-


Milestones: How CHS became CHS1929 North Pacific Grain Growers, Inc.(NPGG) is organized as a regional cooper-ative, based in Lewiston, Idaho, with 60affiliated local cooperatives.

1931 Cenex — the Farmers Union CentralExchange — is founded in St. Paul, Minn.

1938 Farmers Union Grain TerminalAssociation (GTA) opens in St. Paul, with121 local affiliated cooperatives.

1938 NPGG moves its office to Portland,Ore.

1942 GTA moves into wheat milling withthe acquisition of Amber Milling Co. inRush City, Minn.

1943 Cenex purchases an oil refinery atLaurel, Mont., and acquires a one-thirdinterest in the National CooperativeRefinery Association at McPherson, Kan.

1945 Cenex enters the feed,plant food and seed business.Plant food operations areexpanded the next year when itbecomes a major stockholder ofCF Industries.

1960 GTA purchases theHoneymead soybean processing plant andthe Archer Daniels Midland elevator linein southern Minnesota.

1962 NPGG dedicates its new export ter-minal at Kalama, Wash., on the lowerColumbia River.

1971 Cenex begins supplying 60 coopera-tives in the Pacific Northwest formerlyserved by Grange Cooperative Wholesale.

1972 Cenex enters the transportationbusiness by acquiring NorthernCooperative Services of Wadena, Minn.

1975 GTA adds a branch office inPortland, Ore., and opens a barge-loadingterminal on the Mississippi River atWinona, Minn.

1977 GTA purchases Holsum Foods ofWaukesha, Wis.

1977 Cenex begins serving Pacific SupplyCooperatives, adding 67 local coopera-tives in Washington, Oregon and Idaho.

1981 Solar Gas is purchased, makingCenex one of the top 10 propane suppliersin the nation.

tion. So we are fairly unique. We lookat it as an absolute complement.

If you look at ethanol producers,basically they are just that. They processcorn, make alcohol and push it into themarketplace. What we can do at CHS— because of our involvement in bothfuels — is link the demand-bases acrossa lot of refiners who are facing the man-date to produce more ethanol-blendedfuel. Whether it is Cenex, Exxon-Mobil,Concoco or Phillips, all these folks needto buy ethanol. We do exchange pro-grams with them on the refined-fuelside, so we are the natural supplier fortheir ethanol.

From a consumption viewpoint,ethanol may be viewed as a somewhatcompetitive energy source. But in reali-ty, because of the makeup of our busi-ness, it creates an integrated platformthat we can successfully operate from.

Q. What are the odds that oil pricescould drop sharply and cut the legs out from

under the biofuels industry?Does growinginterest in switchgrass and other non-grainfuel stocks worry corn producers and ethanolco-ops?

Johnson: “Long term, biomass tech-nology is probably where it is going togo. I don’t know if that is 10 or 20 years

out. The technology is not yet verygood. When you think of the efficien-cies of converting switchgrass, cornstover and all the other biomass materi-als, the question is: how do you collectthose feedstocks economically so thatthey can compete with corn? Today,


1982 Cenex acquires Western FarmersAssociation, based at Seattle, Wash.,making it the largest cooperative supplierin the Pacific Northwest.

1983 North Pacific Grain Growers andGTA merge to form Harvest StatesCooperatives.

1987 Cenex joins with Land O’Lakes toform the Cenex/Land O’Lakes Ag Servicesmarketing joint venture.

1988 First Cenex convenience storeopens.

1990 Harvest States’ Holsum Foods divi-sion acquires Albert’s Foods, Omaha,Neb., and Private Brands, Chicago, Ill. Thenext year it adds Great American Foods inPhiladelphia, Pa.

1992 Cenex acquires majority ownershipof National Cooperative RefineryAssociation at McPherson, Kan.

1992 Harvest States and Continental Grainenter a joint venture, the Tacoma ExportMarketing Co. (TEMCO) at Tacoma,Washington, for feed grain shipments toPacific Rim countries.

1993 Southwest Grain, Gladstone, N.D.,regionalizes with Harvest States.Regionalization is a unique concept pio-neered by Harvest States that combineslocal control with the services and mar-keting reach of a regional cooperative.

1994 Harvest States begins constructionof a new mill in Kenosha, Wis., andassumes full ownership of the Rush City,Minn., and Huron, Ohio, mills.

1994 Harvest States acquires an exportelevator at Myrtle Grove, La., and a riverterminal at Davenport, Iowa, to strengthenits capabilities for originating and shippinggrain for export.

1994 Harvest States’ Terminal Agency andAg Agency at Cenex/Land O’Lakes com-bine to form Ag States Agency. The jointventure represents more than 1,200 coop-eratives, making it one of the largestcooperative insurance agencies in thenation.

1995 Harvest States and Wilsey Foods, asubsidiary of leading international tradingfirm Mitsui & Co. Ltd., form a joint venture,Ventura Foods, purchasing a food pro-cessing plant at Chambersburg, Pa.

(Continued on page 10)

CHS recently invested more than $725 million in upgrades at its refineries in Montana andKansas, and has invested another $70 million in a bio-energy business.

that really can’t happen. So I don’t viewit as a near-term problem.

When we look at the spread betweencorn values and crude oil prices, I thinkthat spread will stay there for sometime. If I have a fear regarding ethanolproduction, it is around the corn crop.Corn is at something like $2.25 perbushel, but if we had a significantdrought across much of the UnitedStates, it could drive corn values toextremely high levels, like $4 or $5 abushel. That could be devastating toethanol production. Longer term, look-ing at averages — with the spreadbetween corn and crude oil prices — itis a very good economic model.

Q. Grain marketing margins seem toget slimmer all the time. What can CHSand its members do to improve efficienciesto make grain marketing more profitable?

Johnson: “Our grain marketing hasbeen pretty profitable — even stellarthe last couple of years. But on a perbushel basis, you are exactly right.

Margins are very slim. There again, val-ues we generate from grain marketingare not dependent on buying and sell-ing grain. That is where you see thevery low margins. Really, CHS is alogistics provider, which means, yes, webuy and then sell grain to domestic andglobal customers. But the value webring is in logistics, risk managementand transportation. We get paid forthat. To me, the low margin you see ingrain trade is a phenomenon of thebusiness, but the companies that canprovide the other kinds of attributes tocustomers can get paid very well forthat.”

Q. What prompted CHS to get involvedin Brazilian soybeans?

Johnson: “As we deal with globalcustomers, primarily China — whichnow demands about 40-plus percent ofglobal soybeans — it is pretty evidentthat those customers need a supplierthat has dependability 12 months peryear. About half the global supply of

soybeans today is produced in SouthAmerica, the other half in NorthAmerica.

We established three originationoffices in Brazil about three years ago.We walked before we ran, and it’s beenextremely successful. We supply beansfrom South America primarily toChinese customers. But as soon as weknow we can be competitive sellingNorth American beans, we are in thereselling them to customers.

If CHS is going to be a global sup-plier of grain and services, we have tobe global in our origination — particu-larly for soybeans.”

Q. Some producers are concerned aboutgrowing competition from Brazil, given lowland costs and wages there. How can weimprove our competitiveness?

Toelle: One key advantage for U.S.agriculture is our transportation andlogistics systems, which is second tonone. I’ve been in Brazil, and I can defi-nitely tell you it is a competitive advan-


1998 Cenex and Harvest States unite onJune 1 to become what today is CHS Inc.,an integrated agricultural foods systemlinking producers to consumers.

2000 CHS, Farmland Industries and LandO’Lakes Inc. form Agriliance LLC, a jointventure involving the sales, marketing anddistribution of agronomic inputs and serv-ice.

2001 CHS announces plans to form a jointventure, Horizon Milling LLC., in flourmilling with Cargill Inc., with a total of 21mills. CHS producers will be the primarysupplier of wheat for the alliance.

2001 CHS announced plans to acquireFarmland Industries’ share of CountryEnergy LLC, an energy joint venture.

2001 CHS announces the public sale of$50 million in preferred stock in an effortto diversify capitalization of the co-op.

2002 CHS acquires Agway’s Grandin,N.D.-based Sunflower business.

2003 CHS opens Harvest States do BrasilLtda in Sao Paulo, Brazil, a wholly ownedsubsidiary originating and marketing soy-beans from Brazil.

2003 CHS preferred stock is listed onNASDAQ exchange under “chscp.” Thenext year CHS uses preferred stock toredeem $13 million in member equity.

2004 CHS purchases remaining FarmlandIndustries share of Agriliance LLC. Thiscreates a 50/50 joint ownership with LandO’Lakes Inc.

2005 CHS completes $400 million ultra-low sulfur diesel project at its Montanaand Kansas refineries, and announces a$325 million coker project at its Laurel,Mont., refinery.

2005 Ventura Foods acquires Maries®and Dean’s® dressings and dips.

2005 CHS reports record $250 million inearnings.

2006 CHS system marks its 75th anniver-sary and issues a record $151 millioncash and stock disbursement to mem-bers.


tage for the U.S. But there is also a crit-ical need to improve the nation’s water-ways, especially along the UpperMississippi, where we have locks anddams that are antiquated. With the risein energy costs, rivers are by far themost efficient method of transportinggrain, farm inputs and other freight upand down the river. Devoting moreresources to improving our waterways isa key legislative priority for CHS.

On the trade front, as we negotiateon the World Trade Organization, weneed to be very careful not to disarmourselves with legislation in a new FarmBill that would weaken our negotiatingposition. We feel it may well be prudentto extend the current legislation pend-ing the outcome of WTO talks.

Q. John, what have been your biggestsuccesses and disappointments while servingas CEO?

Johnson: “I’ve been CEO, or theequivalent, for 11 years. That’s a longtime for a CEO. The average in corpo-rate America is five years or less. I gotthe job at a young age — 44 or 45. Sothere have been some of both duringthat time.

I feel very proud of the formation ofVentura Foods in 1996. Here is a com-pany that has generated a 30-plus per-cent return on equity ever since it start-ed. It was originally a very small organi-zation, but is now one of largest pack-agers of oil-based food products in theUnited States, with 16 plants. And wedid it with an international partner,Mitsui & Co. of Tokyo. In 1996, busi-ness partnerships were relatively new.Going across the ocean and finding apartner was somewhat revolutionary atthe time. The company continues to dowell, and our relationship with Mitsuicontinues to be extremely strong. It hasallowed us to do other things with part-ners. It took a lot of work from our staffto put together.

An equal, or even greater, accom-plishment was the formation of CHS.Think of it: two of the largest co-ops inthe U.S. were able to look at the futureand had the ability to put together anorganization like this, the 188th largest

company in the U.S. today. And it isowned by farmers and co-ops. We’vebeen able to put together effective man-agement teams through all the acquisi-tions and mergers. It’s ultimately allabout people and putting the best possi-ble people on the job to create a win-ning team.

My biggest disappointment was cer-tainly that our Mexican foods divisiondidn’t work out as expected. I had avision of expanding our food businessand felt very strongly that we could doit on our own. It turned out that wecould not.

Mexican foods was a great strategy,but we failed at it. We bought somecompanies at substantial discounts, butprobably got what we paid for. Anothereye opener for us, as well as for a lot ofother companies, is the need to makesure that you have the skill sets to besuccessful in companies that operate inchallenging management environments.We ultimately came to the conclusionthat we didn’t, so we sold it. When youare not succeeding, recognize it earlyand do something about it.

I don’t dwell on mistakes. Everyonein the management world is going tomake mistakes. If you think not, you arefooling yourself. When you find your-self in a situation where you can’t exe-cute, you make an adjustment and moveforward. We in management — as I tellthe board all the time — have got to becareful about how hard you punish mis-takes. They will happen, because that’swhere innovation comes from — it’swhere people go out and look for newways to create value. The main thing is,you don’t want to make the same mis-take twice. But when you make a mis-take, don’t live with it forever. Take cor-rective action and move forward.”

Q. What is on the CHS drawing boardright now that you are most excited about?

Johnson: “Renewable fuels and howthey fit with our company is by far thehighlight right now. It is a very excitingarea that is growing extremely fast.New plants are being considered eachand every day here. It holds a lot ofvalue for our member-owners.”

Toelle: “Part of the vision of CHS isconnecting producers with the con-sumer, and we’ve been doing that onthe food side, especially in grainsthrough Ventura Foods. When youthink about the renewable fuels plat-form, it presents another aspect of theCHS vision: the producer-to-consumerconnection.”

Q. Can CHS and other co-ops help keepmore family farms in business, or is contin-ued drift toward industrial-scale farmingthe only real future for U.S. farming?

Toelle: “Through our local co-opsand country operations, our mission isto provide value back to producers. Wethink we offer a platform of access toworld markets, integration betweensupply and grain outputs and food pro-cessing. And we drive that value back tothe local level.

You will continue to have a diversemakeup of farms in the U.S., dependingsomewhat on geography and crop mix.We certainly spread our value across allproducers. It is up to them to run theirbusinesses at the size and scale that theythink works for their operation.”

Q. There is much debate about statesadopting new co-op incorporation laws thatallow for a broader definition of what a co-op is. What factors are fueling this move-ment and what does it mean for the futureof farmer-owned co-ops?

Johnson: “I’m not sure I even knowwhat a traditional co-op is any more.There are a tremendous amount of dif-ferent structures being used, includingby ourselves. We are a traditional co-op, but — by the same token — we usemany different capital structures toaccomplish our objectives. An exampleis our preferred-stock program thattrades on the NASDAQ. This is fairlyunique in the co-op world. But it does-n’t interfere with our core co-op valuesbecause this is non-voting stock.

Control and governance of the com-pany stays in the traditional form, withproducers. We use a lot of limited lia-bility corporation (LLC) structures. Wehave LLCs with other co-ops, with pri-

continued on page 28

By Tyler Christensen

Montana Missoulian

Editor’s note: this article is reprinted cour-tesy of the Montana Missoulian.

t’s easy to find uses forsmall-diameter trees andwoody biomass. It’s not soeasy to find a cost-effec-tive way of getting that

material from the forest to the peoplewho can use it. But Craig Thomas andhis Ravalli County business, All WoodyResources, are working on a method ofcollecting logging debris at the job siteusing special container trucks capable ofgoing wherever logging trucks go —with the goal of making small-woodcollection in Montana’s forests econom-ically feasible for the first time.

The company’s effort gota significant boost in Aprilin the form of a $228,000check presented in personby the U.S. Department ofAgriculture’s Undersecre-tary for Rural DevelopmentThomas Dorr. The checkwas part of $4.2 million inUSDA Forest Servicegrants given to 18 smallbusinesses whose workhelps remove economicbarriers to the use and mar-keting of woody material,Dorr told a wind-whippedcrowd at the JohnsonBrothers wood recyclingyard in Missoula.

“Everybody is fully cog-nizant that small businessesare the economic drivers of

the U.S. economy,” Dorr said after pre-senting the check. “I suspect this isgoing to be a very successful project, allbecause small business people are will-ing to step in and do their part.”

All Woody will use most of themoney to buy more container trucksand to launch a marketing program,said Rosalie Cates, executive director ofthe Montana Community DevelopmentCorp., which has been working withThomas to test and develop the newcollection method.

Basically, the company uses a systemof trucks and containers to transport log-ging debris — also called slash — to acentral collection yard near Stevensville,where the woody biomass is sorted forsale. This sort of material is usually inac-cessible and often burned to reduce theamount of hazardous fuels in the forest.

By allowing businesses to collect thatmaterial, the forest will benefit fromfewer wildfires and the government willsave money by having less slash to burn.Also, fewer burns means better air qual-ity — which everyone can appreciate.

“In my book, no matter how you cutit, that’s a win-win situation,” Dorr said.

However, the financial heart of thebusiness is the central yard, where thewood material can be amassed on a suf-ficient scale to be conveniently and eco-nomically picked up, processed or deliv-ered, Cates explained.

Thomas, who counts 30 years in theforestry business and currently con-tracts with Johnson Brothers, startedworking on the collection system threeyears ago with the help of MCDC andseveral partner-businesses. After exten-sive study and testing, they decided on

the current method as themost cost-effective way toaccess the greatest quanti-ty of woody biomass.

“It is actually not themost economical methodof collecting slash, but itwill work where othermethods won’t,” Thomasexplained.

It’s been used onrestoration projects onBlue Mountain and PatteeCanyon, he said, andproved particularly usefulon Pattee Canyon roadsinaccessible to othermachines.

In fact, logging debrisis inaccessible in about 90percent of all loggedareas, said Chuck Seeley,


Montana fo rest fue l co l lec t ionbus iness wins USDA/RD grant

I

Forest thinning operations – conducted here by Horizon Tree Service andAll Woody Resources — will lessen the threat of a devastating forest fire.The wood chips will provide fuel for generating electricity. Photo courtesyMontana Community Development Corp.

griculture Secretary MikeJohanns in late Aprilannounced about$495,000 in competitivefunds are available to

institutions of higher learning to con-duct research on the national economicimpact of cooperatives.

“Cooperatives play an important rolein the growth of our rural economy,”said Johanns. “This research will helpto measure the full impact cooperativesare making in rural communities acrossAmerica and provide USDA with anoverview of what is working and howcooperative businesses can play centralroles in vibrant rural economies.”

The competitive funds will be used

to establish cooperative research agree-ments with institutions to examine theimpact of cooperatives, in cooperationwith USDA Rural Development. Eachagreement will include guidance on thedevelopment of a methodology for col-lecting and assembling basic impactdata; applying the methodology to col-lect data and analyze the economicimpact of cooperatives and other appro-priate studies to examine the socio-eco-nomic impact of cooperatives on localcommunities. Projects must be com-pleted by September 30, 2008.

Potential applicants are institutionsof higher education; public or privatecolleges or universities, research foun-dations maintained by a college or uni-

versity or private nonprofit organiza-tions funded by a group of colleges oruniversities.

Application forms, guides and mate-rials for the cooperative agreement canbe found at: http://www.rurdev.usda.gov/rbs/coops/reic.htm or by contactingUSDA Rural Development at (202)690-0368; TDD: (800) 877-8339.Paper applications must be received inthe USDA Rural Development Nat-ional Office, postmarked no later thanJune 30, 2006; electronic applicationsare to be received by the same deadlinedate via: http://www.grants.gov. For more information, go to: http://www.rurdev.usda.gov/ and click on“Available Funds.” ■


a forester with Smurfit-Stone Container Corp.’s ForestResources Division.

“This makes it a lot more accessible,” Seeley said ofAll Woody’s new collection method.

Smurfit-Stone contracts for slash grinding and delivery— with Johnson Brothers, among five or six other com-panies — and uses the woody material to generate powerand electricity for the mill, Seeley said. The companyburns through about 30 van loads of such material a day.

“We generate enough power to run our whole mill,”he said.

Thomas and his grant partners — Levi Cheff of FireSolutions Inc., Rob Castellano of Horizon Tree Service,Kit Sutherland of Bitterroot Resource Conservation &Development and University of Montana assistantforestry professor Beth Coulter — as well as Montana’swood products industry in general, are part of the solu-tion to having a healthy forest, said Craig Rawlings,smallwood enterprise agent for MCDC.

If not for their harvesting, transporting and processingof very small diameter wood, all that material would beburned or hauled to a landfill, Rawlings said.

Not only would that be a huge waste, Thomas added,but it would ultimately hurt the forest he and other life-long foresters have to rely on for their livelihoods.

“Although I’m a harvester of trees, I’m trying toenhance the lives of the trees that we leave,” he said.“What we’re trying to do here is treat the forest with loveand care.” ■

USDA funds co-op impact research

A

Agriculture Under Secretary Thomas Dorr in Aprilannounced nearly $4.2 million in grants to 18 small enterprisesto develop innovative uses for woody biomass in nationalforests as sources of renewable energy and new products."This grant program helps to reduce the risk of wildfires byremoving built-up fuel hazards and improves forest health,"said Dorr, in Missoula, Mont., to announce several Earth Dayinitiatives by USDA. "In addition, these projects give an eco-nomic boost to our rural communities, increasing the nation'ssources of renewable energy."

This year's recipients were selected based on a number offactors, including those that make it economical to removewoody biomass from forest lands and turning it into mar-ketable products, while reducing the costs of recovery. Inaddition, grants were awarded for projects targeted at remov-ing economic and market barriers in using small-diametertrees and woody biomass.

All 18 grant recipients must match the federal portion by atleast 20 percent. Together with the non-federal matches,approximately $13 million will be spent on this effort. For a listof grant recipients and more information on the program, visit:http://www.fpl.fs.fed.us/tmu/grant/biomass-grant.html.

USDA awards $4.2 mill ionfor wood biomass projects

By Todd Thompson,

Country Manager

Land O’Lakes Inc. — UgandaE-mail: [email protected]

ost people know Land O’Lakes, Inc. as the pro-ducer of America’s top butter brand, one of thecountry’s leading farmer-owned cooperatives anda major player in agricultural supplies. But feware aware that the dairy cooperative giant has an

International Development Division that has been helping farm-ers and rural businesses increase productivity in developingcountries around the world for 25 years.

In the east African country of Uganda, Land O’Lakes hasbeen implementing a private sector-based dairy developmentproject since 1994. The project provides technical assistance atall levels of the dairy value chain — from smallholder farmers tomilk-bulking cooperatives and collection centers to processors ofmilk and value-added products like cheese and yogurt. LandO’Lakes’ presence has helped Uganda’s dairy industry expandand become more efficient, increased the popularity of dairyproducts among consumers and raised income and profits forsmallholder dairy farmers and rural enterprises.

Project staff based in Uganda and short-term consultants —many of them U.S. farmers and agribusiness experts — offer


Bot t l ing Hope in Af r icaLand O’Lakes providing boost to Ugandan dairy industry

M

Milk is delivered to market by Masaka farmers, who areaveraging an additional $349 per household as a result ofparticipating in a Land O’Lakes-directed project to improveproduction practices. Photos courtesy Land O’Lakes

Dorcus Inzikuru, Uganda National Athletic Champion in 2004,reveals one of the secrets to his success: the vitamins and miner-als his body gets from milk.

advice on a wide variety of topics. Theseinclude: cooperative development, mar-keting, milk bulking and handling,value-added processing, production,policy reform and industry organization.Funding for the Uganda project andother Land O’Lakes economic develop-ment initiatives overseas comes primari-ly from USDA and the U.S. Agency forInternational Development.

Much of the Uganda project’s cur-rent funding came from the recent saleof 11,100 metric tons of donatedAmerican wheat on the local marketunder USDA’s Food for ProgressProgram. Under this monetizationprocess, USDA takes excess commodi-ties raised by American farmers andconverts them to cash in developingcountries to provide grants to imple-ment development projects. A study isdone before the sale to assure it will notdisrupt local production and markets.

Getting results Stimulating sustainable economic

growth to alleviate rural poverty is amajor goal of the Uganda project. Thecountry’s economy is largely agricultur-al, and two-thirds of the country’s poorare smallholder farmers. To date, theUganda project has achieved resultsthat include:• $349 average annual increase in

household income for participating

farmers (average per capita income is$270 a year);

• 28 percent increase per day in milkproduction in participating animals;

• 45 percent increase in processing-capacity utiliztilization;

• 6.5 million-liter increase in domesticconsumption of processed dairy prod-ucts;

• 75,000-liter increase per day in milkentering the cold chain;

• 89 percent increase in membership inproducer organizations.

A recent success story involvesMADDO Dairies Ltd., a company thatbegan operating a 1,200-liter micro-processing plant in the town of Masakain 2003. MADDO buys milk from localfarmer cooperatives and processes itinto flavored milk and yogurt. Likemany start-up enterprises, MADDOhad good ideas but lacked the knowl-edge, systems and internal controlsneeded to effectively manage its opera-tions.

With Land O’Lakes’ help,MADDO’s management turned thecompany around, instituting financialand other reforms that brought it fromthe brink of collapse to profitability by2005. Within one year, the amount ofmilk purchased from area farmersincreased from 74,800 to 208,580 liters,increasing their income from milk sales

by more than 200 percent. Production efficiency at MADDO

was improved with a cooling towerdeveloped by Land O’Lakes’ SamSebadduka, supervisor of milk qualityand dairy processing in Uganda.Sebadduka developed a water-coolingtower that recycles water used in cool-ing the pasteurization unit. Adoption ofthis simple technology cut water usagefrom 90,000 liters a month to 40,000. Italso reduced the share of water as a costof production from 4.3 percent to 1percent.

Uganda currently produces 1.2 bil-lion liters of milk per year. Of that, 40percent is consumed on the farm. Ofthe rest, about 20 percent enters the“formal” market in the form ofprocessed and value-added productsworth $108 million. The remainderenters the “informal” market, wheresmall-volume traders buy milk and sellit unprocessed to consumers, who thenboil it at home. The value of the infor-mal market is about $160 million.

Central role for co-opsBecause rural cooperatives play a

central role in Uganda’s dairy industry,much of the project’s emphasis is in thearea of cooperative development. LandO’Lakes’ advisors help all types ofgroups, from those still in the initialplanning stages to large establishedbusinesses with turnovers approaching$1 million a year. The project adviseson issues such as governance, member-ship responsibilities, the role of theboard and legal registration.

Because many smallholder farmershave no experience running commercialenterprises, Land O’Lakes also providesassistance in business management.Many groups, regardless of size, areweak in accounting and financial man-agement, leaving them unable to tracktheir funds and plan for the future. Toaddress this problem, Land O’Lakes isintroducing a common accounting soft-ware program to the cooperatives itadvises.

“This will help tremendously in get-ting the cooperatives we work with to


“Milk is Fun!” is the message at this rally for Ugandan school students.


Type of Business:Husker Ag LLC, Plainview, Neb., is

a majority producer-controlled ethanolventure.

Business Objective:The traditional operating procedure

of ethanol plants for processing drieddistillers grains (DDG) is to mechani-cally dry this byproduct (or co-product)from a 70-percent moisture contentdown to 10 percent, and then market itas livestock feed. This drying processconsumes large amounts of natural gas.Husker Ag will market its DDG co-product as a “modified” product con-taining about 55 percent moisture,thereby reducing the amount of naturalgas consumed and netting a substantialannual decrease in energy costs. Airemissions will also be reduced.

Annual Sales:As a fuel-grade ethanol production

plant, Husker Ag LLC processes 8.5million bushels of corn annually intomore than 20 million gallons of fuel-grade ethyl alcohol (ethanol). A sec-ondary product produced is dried dis-tillers grains, which are the corn com-ponents that remain after the starch isconverted to ethanol.

Ethanol production is presently inexcess of 25 million gallons per year, anoutput which exceeds the facility’s esti-mated projections. Co-product revenueshave contributed more than $6 millionyear to date.

Number ofmembers &employees:

Husker Aghas more than500 members,about 70 per-cent of whomare agricultural producers. Employmenthas increased from 30 to 32 employees,thanks to the development of the newco-product.

How USDA Helped:Husker Ag received a $226,850

Value-Added Producer Grant (VAPG)from USDA Rural Development, whichwas matched by Husker Ag. The moneyis being used for working capital to fur-ther the development of the value-added processes for area corn.

Leader’s comment:“The USDA Rural Development

grant will allow us to employ a co-prod-ucts merchandiser and to supplementthe salaries of the plant maintenancemanager and plant lab manager to pro-ceed with our distillers grain produc-tion,” says Seth Harder, general man-ager for Husker Ag. “This will benefitarea feedlots and member-producers.Additionally, these funds will help topurchase corn inventory for productionpurposes.

“Feedlots will benefit from the co-product produced, as it is an excellentsource of protein and energy for live-stock,” he continues. “The plant willhave the capacity to produce co-productto feed 80,000 head of livestock.”

The Results: The ethanol plant has increased the

local demand for corn, resulting in ahigher local corn price. Farmers used tobe paid only a wholesale commodityprice for their corn which, in turn, wasshipped out of the immediate area.Currently, Husker Ag pays an average of5-to-10 cents per bushel over the prevail-ing corn market price. Since the plant islocated closer to the producers’ opera-tions than other traditional markets, localfarmers haul their own corn vs. having ittrucked for them, saving on truckingcosts and increasing their income.

Major Challenge/Opportunity Facing Co-op:

“The biggest challenge facing co-opstoday is finding a nitch to guaranteeprofitability and market share in a rap-idly growing industry,” says Harder.

Contacts: Seth Harder, general manager;

Shaun Waldow, plant manager; Fred Knievel, board chairman.

Husker Ag LLC54048 Highway 20Plainview, Neb. 86879Phone: (402) 582-4446E-mail: [email protected] ■


V A L U E - A D D E D C O R N E R

Husker Ag LLCPlainview, Neb.

Husker Ag used a Value-Added Producer Grant to help make its drieddistillers grains more marketable. DDG and other co-products have con-tributed an additional $6 million to the producer-owned business’ bottomline so far this year. Photo courtesy Husker Ag

By Julie A. Hogeland, Ag Economist

USDA Rural Development,Cooperative Programs

Editor’s note: the author welcomes feedback from readers on the topic of co-opconversions; their thoughts may be used assubject matter for forthcoming articles on this topic. E-mail her at: [email protected].

ince the early decades ofthe 20th century, agricul-tural cooperatives havebeen associated with par-ticular values that have

influenced their marketing strategies.The traditional strength of cooperativesis that they help protect producers bycreating a reliable and fair buyer fortheir products and enabling producersto control their destiny by providing amarketing channel that can extend fromraw commodity to finished product.

Co-ops help establish orderly mar-keting channels and bring balance tomarkets where producers would haveminimal bargaining power in highlyconcentrated industries. Likewise, theyprovide a reliable and fairly pricedsource of production supplies. Co-opsalso help strengthen rural communitiesby keeping more dollars close to home.

What happens to these values whencooperatives convert to a publicly trad-ed corporation? Will producers sufferfrom narrower marketing choicesand/or lower returns? If so, could thiscreate fertile ground for new coopera-tives? Does the decreasing number ofproducers and changing market condi-tions lessen the need for cooperatives,or are they more vital than ever due to

increasing concentration in the foodprocessing and retailing industries?

Professor Michael Cook of theUniversity of Missouri says, “Therecent wave of demutualizations raisesthe question of whether the coopera-tive model can survive in an increas-ingly concentrated, deregulated, priva-tized and global business environ-ment.” This article focuses on severalrecent co-op conversions (also called“demutualizations”) and some of theissues they raise for their former mem-bers, as well as a proposed co-op con-version that was defeated.

For Diamond Walnut Growers, thetouchstone for conversion was the coop-erative brand and the desire to use it toattract large amounts of outside capitalto “grow the brand” and penetrate newmarkets. For Ocean Spray Cooperative,owner of a major consumer beveragebrand, near-acquisition of its brand byPepsiCo became an opportunity to reaf-firm that the 76-year-old cooperativewas to be held in trust for future genera-tions of growers as a sustainable, value-added marketer of cranberries.

Within this increasingly concentrat-ed, deregulated, privatized and globalbusiness environment, cooperativeshave sometimes sought to become “justanother business.” This can become aself-fulfilling prophecy. Cooperativevalues, and the extent to which produc-ers hold them, may make the differencebetween conversion, acquisition orremaining under producer control.

Protecting farmers vs. building the brand

Traditionally, marketing cooperativesare often seen as a “competitive yard-

stick,” providing competition to raisethe prices received by producers.Formulated by economist EdwinNourse, this role emphasized farmers’collective power or strength in the mar-ketplace. Cooperatives were the “smallbusiness Davids” that challenged the“Goliath of big business.” Competitionprovided through cooperatives keptother firms in the marketplace fair orhonest. Even when cooperatives hadimproved market conditions, Noursestill felt farmer vigilance was required.Cooperatives should maintain on stand-by, ready to spring into action to pro-tect farmers as needed.

At the core of traditional attitudes is abelief that cooperatives are fundamental-ly different from investor-owned or pub-licly-traded firms, hence the need forvigilance like that recently expressed by amanager of a large processing coopera-tive. Any entity that is not farmer ownedand controlled is a competitor thatmakes it difficult for farmers to compete,he said. “If a corn grower’s crop fails, theprocessing firm doesn’t care as long asthey can continue to get corn from


Co-op Convers ionsExtent of commitment to co-op valueskey factor in decisions to convert

SEconomist Edwin Nourse likened co-ops to“small business Davids” that enable farmersto do battle with industrial “Goliaths.” Photo of stained-glass window at First PresbyterianChurch, Van Wert, Ohio, by Terry Dietsch

somewhere to make cornflakes.” Contemporary economic or strategic

management discourse is, in contrast,highly optimistic, such that farmer vic-timization would seem to be a thing ofthe past. “For most global businesses,the days of flat-out predatory competi-tion are over,” say Morgan and Hunt(1994:20). The new rules of marketcompetition call for networking, part-nering and trust. In this setting, thefarmer protection provided by coopera-tives and even cooperatives themselvescan seem like an anachronism.

This market-oriented school ofthought tries to minimize the differencebetween cooperatives and investor-ownedfirms by examining how well coopera-tives perform according to some of thecommonly used standards of investorowned firms (IOFs). These include:• Mission clarity — a singleness of pur-

pose, such as a drive for profitabilitythat motivates investor-owned firms;

• Global sourcing — buying raw mate-rials wherever they are cheapest inorder to lower manufacturing costs;

• Growth;• Efficiency;• Obtaining sufficient capital to survive

and grow in an industrialized foodsystem.

In contrast, the values encouraged bythe competitive yardstick are:• protecting growers;• providing an assured market;• strengthening rural communities;• combating monopoly;• providing support for local growers; • ensuring competitive markets;• providing grower control of destiny

through ownership.

Capper-Volstead still vital? Market-oriented values are in the

ascendancy, shaping perceptions of theneed for grower protection, or evencollective marketing itself. To MarkHansen, an attorney with Lindquist andVennum and the architect of severalcooperative conversions, the Capper-Volstead Act — which provides limitedanti-trust exemption to farmer coopera-tives engaged in marketing their prod-

ucts — reflects an era that no longerexists. For that reason, he questions theneed for the Act itself.

“Why do farmers need Capper-Volstead?,” Hansen asks. “When dothey need to collectively price a productcompared with selling it individually toCargill?” In 1921, farmers were notlooking for processing facilities, justproduct marketing. In that period, thesupply of farmers was essentially “end-less” compared with today’s very lowfarm population. And some of them areseeking an exit strategy from farming.Capper-Volstead did not address capi-talizing a significant branded productinto the marketplace, says Hansen.

How technological aspects of mar-keting and procurement will affect tra-ditional cooperative issues of equity,equality of opportunity, disproportion-ate market power or market access is

not clear. Agricultural industrializationbrought new values, such as “size andscale” and “being a low-cost producer,”to agricultural cooperatives. Consumer-branded products offered growthopportunities that did not exist for theminimally-processed products tradition-ally handled by cooperatives.

Now, cooperative managers ask,“How can I take the value of the brand,unlock it and make it liquid?” Othersask, “How can I get additional low-costsupply to increase product demand?”As cooperatives became “market-driv-en” and “value-added” businesses, some

industry observers suggest a focus onprofit has begun to diminish the othervalues provided by cooperatives. In doc-uments filed with the SecuritiesExchange Commission (SEC), coopera-tives pursuing conversion routinelystate their commitment to market-ori-ented values such as growth, improvingprofitability and efficiency, and enhanc-ing the return on the product brand.

The July 2005 conversion ofDiamond Walnut Growers intoDiamond Foods, a publicly traded firm,offers a commentary on changing coop-erative values in some sectors. In 1912,the California Walnut MarketingAssociation, the precursor of DiamondWalnut Growers, initiated orderly mar-keting in the walnut industry through afederation of local walnut packingcooperatives. As the federated structureevolved into a centralized cooperative,Diamond Walnut’s strong marketingorientation emerged.

The cooperative became a leadingdomestic marketer and distributor ofculinary nuts. In the late 1990s,Diamond Walnut focused on becominga more competitive supplier to U.S.grocery chains and, in 2004, launchedits Emerald brand of snack nuts. Theseobjectives conflicted with the traditionalcooperative values of “enhancing theraw-product price” and providing ahome for growers’ product.

As a cooperative, Diamond Walnut’spricing philosophy was, “A rising seafloats all boats.” Since 1965, DiamondWalnut’s average annual premium abovethe market has been 1.56 cents perpound (source, Diamond Foods). TheWalnut Purchase Agreement accompa-nying conversion requires growers todeliver their entire crop to DiamondFoods for the duration of the contract:three, five or ten years. The contractoffers no price protection or guaranteesto pay market prices. Indeed, DiamondFoods has cautioned growers that pay-ments could be reduced compared withthe prior marketing agreement.

Producers more vulnerable?University of California Economist

Shermain Hardesty suggests these sin-


“A co-op has a differ-ent job than a publiclytraded corporation,which lowers the pricespaid for inputs.”—Chris Phillips

gle-buyer (monopsonistic) conditionscould make the contracting growersvulnerable to price manipulation.

“A lot of growers had in their mindsthat they would still be protected eventhrough the conversion,” commentedone former member. “But the companywill have to decrease expenses.Management will procure the cheapestproduct rather than maximize the priceto a grower, as a co-op does. A coopera-tive would keep the industry from tak-ing advantage of growers.”

At the time Capper-Volsteadwas enacted, the market powerof each one of the “endless sup-ply of farmers” was so limitedthat economics textbooksdescribed the farmers as “atom-istic” compared with the size ofthe businesses they were upagainst. Imbalance and disparitycontinue to describe agriculturalmarkets. Consolidation of agri-cultural markets in recentdecades means many farmershave only one buyer.

National CooperativeBusiness Association (NCBA)CEO Paul Hazen says the beliefthat predatory marketing no longerexists is shortsighted. “Cooperativeshave made farmers into price setters,not price takers. By selling these busi-nesses, we’ve lost this tool.” Hazenadds that if farmers’ only option is tosell to one huge agribusiness, “they areat the mercy” of that agribusiness.

The durability of the cooperativemodel — which has lasted for morethan 150 years — is being threatenedfrom the inside, many believe. AnNCBA study found that most conver-sions are triggered by management. Asmall group of people motivated tochange the business may present mem-bers with an ultimatum and only a veryshort period of time to vote. Theabsence of share ownership to compen-sate and motivate management can bean incentive within cooperatives, in par-ticular for incumbent management toencourage conversion.

With conversion, select members,directors or management can cash-out

at one moment in time the long-termvalue of a cooperative, painstakinglybuilt up through the ups and downs ofcommodity cycles by (in many cases)several generations of producers. Totalstock benefits received by a four-mem-ber management team at DiamondFoods could top $16 million, accordingto NCBA. To avoid short-circuitingmembers, Hazen recommends an openand transparent process, requiring highthresholds of member approval toapprove conversion.

When brand becomes paramountAnother inside threat occurs when

many cooperatives’ chief asset, theproduct brand, comes to drive thecooperative more than the needs ofmembers for whom it was founded. Inthe mid-20th century, the California-based avocado cooperative Calavomainly identified with and promotedHaas avocados (Stanford andHogeland). This restricted its ability togrow by attracting members with othervarieties. Calavo resolved this byaggressively promoting members’ fruitand establishing its own brand.

Getting full benefit of brand devel-opment required more and cheaperavocados than California memberscould supply, so the cooperative turnedto non-member supply from Mexico,Chile and New Zealand. Calavo con-verted in 2001. Outside investment —e.g., product, equity or foreign-directinvestment — may be needed to derive

maximum benefit from the marketdevelopment behind a cooperative’sbrand name.

Cooperatives exist to provide asecure market for their members. A co-op manager facing heightened importcompetition brought by trade liberaliza-tion said this value represented a “hugeincentive” for his processing coopera-tive not to convert. Perpetually on thelookout for cost advantage, any cooper-ative which converts could disenfran-chise a portion of its former grower-

members in rural areas where alter-native income opportunities may bescarce.

Although the United States isthe leading exporter of walnuts,Hardesty suggests that to fulfill itsmission to maximize long-termshareholder value, Diamond Foodsmay import walnuts from China,the world’s largest producer.California-grown walnuts couldthen experience reduced demandand depressed prices as a result.

Trade liberalization allows ven-dors to source globally, to compareprices from many suppliers. This isa “low-cost supplier” model of

competition. The economic norm ofefficiency renders such competitionimpartial, even if the impact on rawproduct suppliers of such instability isin effect not much different frompredatory (destructive) competition.

Welch’s, the grape products coopera-tive owned by National GrapeCooperative, is committed to using thedomestic grapes of National Grapemembers as its “first supplier.” It buysall of the co-op members’ grapes — areflection of the traditional cooperativevalue of finding a home for what is pro-duced by members. This holds truewhether grower-owners provide as fewas five tons per acre or as much as ninetons per acre, as long as quality stan-dards are met.

Supply variation has spurred cooper-ative growth. Welch’s, like many co-ops, markets globally. Through marketsegmentation, global sourcing may sup-plement domestic production to pro-vide cost and profit advantages that


Caravaggio’s painting shows David with the head ofGoliath, a story frequently used to symbolize the struggle of small co-ops with much larger competitors.

define sustainable competitive advan-tage. But Welch’s commitment toreceive all of the quality grapes pro-duced by its grower-owners is the kindof approach that clearly protectsdomestic farmers.

Cooperatives ask more of themselvesthan competing business models andcan risk over-extending themselves onbehalf of their producers. Almost 20years ago, economist V. James Rhodesdeclared, “one of the unique obligationsof cooperatives is a commitment to thecontinuation of past and present mem-ber service that goes beyond that of theIOF” (1987:166). The consequences ofhow this line is drawn may have greaterramifications now than it did in thepast. When cooperatives pay higherthan the market price, they can tellfarmers, “We took care of you; you gotthe money first, so the co-op didn’tmake any money.” Farmers may likethis, especially if they are not necessari-ly concerned about the future of theorganization.

Before it can take care of farmers,the cooperative has to be a sound busi-ness. Overpaying market prices tomembers can lead to “capital starva-tion” within cooperatives. Membersneed a competitive return on bothproduct marketed and investment.Making investment proportional topatronage is one way to achieve thisobjective.

Using relationships to build a brandBy seeing other firms as adversaries,

the Nourse model of cooperation tend-ed to segregate cooperatives from therest of the business community. Theexpression “cooperatives as the FourthEstate” captured this distinction.Exploiting the concept of the “coopera-tive difference,” cooperatives estab-lished their own version of the market-ing or supply channels used by privateindustry.

Cooperatives tried to “do it all” byproviding an integrated food systemthat took the raw product from “farmgate to plate.” Likewise, Ocean Spraytried to “do it all” by going from “bogto bottle,” managing and controlling

every aspect of the supply chain. In June 2004, Ocean Spray members

rejected an offer from PepsiCo thatwould have given the corporation con-trol of the Ocean Spray brand and juicebusiness. The Nourse “mythology” —which prized cooperatives as “smallDavids among Goliaths” — held nosway for those cranberry producers who

favored the PepsiCo joint venture.They argued that Ocean Spray couldnot survive on its own in a world ofgiants. Too small to go it alone, thecooperative needed a partner, they felt.

The debate over the joint venturewas a healthy experience for OceanSpray. A much deeper dynamic thandollars was involved: at stake was thegrowers’ right to control their destinyand maintain a multi-generational wayof life. Reflecting on the pre- and post-debate period, Ocean Spray spokesmanChris Phillips said, “You can have itboth ways—maintain cooperative statusand have a major worldwide brand. Alot of people have looked at coopera-tives as outdated, but it’s a very boldbusiness model. Cooperatives have tobe different in how they partner withothers, in distribution, in manufactur-ing, in how they go to market. A coop-erative needs to maintain majority con-trol over its brand so at the end of theday it’s still a cooperative.

“But staying a cooperative doesn’tmean going it alone. By partneringwith others, you can still go global andset grower returns on a healthy growthcurve. Our returns have more thantripled in the last four years. A cooper-ative has a different job than a publiclytraded corporation, which lowers theprice paid for inputs. Ocean Spray’s jobis to deliver to members a competitivecommodity price and a dividend forowning a major brand.” For approved,contracted acreage, Ocean Spray takesall the fruit grower-members produce.

Less ownership, more controlWithin Nourse’s “yardstick” philoso-

phy, farmer control was expressed — orobjectified — through investments intangible assets such as processingplants, grain elevators or marketingfacilities. The mark of ownership wasoften exclusivity, for example, the abilityto “drop in” on the manager at will orto conduct site tours that now may beprecluded by health and safety restric-tions (for example, among artificialinsemination or pork cooperatives).

Exclusivity influenced the operatingphilosophy established for CFIndustries, a fertilizer cooperative. Itwas started in 1946 as a fertilizer bro-kerage operation by a group of regionalcooperatives seeking to pool their pur-chasing power. CF grew to be one ofNorth America’s largest manufacturersand distributors of nitrogen and phos-phate fertilizer products. It was ownedby eight farmer cooperatives: CHS Inc.,MFA Inc., Growmark Inc., SouthernStates Cooperative, Land O’Lakes,Tennessee Farmers Cooperative,Intermountain Farmers Association andCooperative Federee de Quebec.

Through the end of 2002, CF oper-ated as a traditional supply cooperative,focused on providing its cooperativeowners an assured supply of fertilizer.SEC documents note that more than 80percent of CF’s annual sales volume wasto its cooperative owners. CF diversi-fied into fertilizer manufacturing andexpanded its distribution network, start-ing in the 1960s, by acquiring several



Protecting themarket share ofproducer-membersstarts with theselection of a CEOwho is willing tomake this commit-ment.


By Donald A. Frederick

Program Leader for Law,Policy & Governance;USDA Rural [email protected]

tate and local govern-ments that see opportuni-ties to hold down costs byprocuring goods and serv-ices through a cooperative

should gain assurance from a recentInternal Revenue Service (IRS) admin-istrative determination. While noSubchapter T tax issues are involved,the decision highlights another InternalRevenue Code (Code) section helpful topublic institutions which organize aseparate entity to engage in joint pur-chasing activities.

Code Sec. 115 provides that grossincome for federal income tax purposesdoes not include income accruing to astate or territory, or any political subdi-vision thereof, which is derived from a“...public utility or the exercise of anyessential governmental function.” Thisprovision gives state and local govern-ments the flexibility to create separateentities to perform essential serviceswithout incurring federal income taxliability on earnings that are (1) gener-ated by those entities and (2) retainedwithin the public sector.

In Private Letter Ruling 200610001(released March 10, 2006), the IRSdetermined that income earned by anonprofit corporation, formed by publicschool districts for the purpose of coop-eratively purchasing supplies, is not tax-able income under Code section 115.

Case factsTwo school districts formed a non-

profit corporation for the sole purpose ofpurchasing goods and services for publicschool districts and other members. Theruling points out that “Through cooper-ative purchasing power, Taxpayer enablesits members to purchase a range ofgoods and services at reduced prices.”

The ruling doesn’t discuss whobecame members of the association, itsgovernance structure or its previous taxhistory. But as the basis for submitting itsrequest for a ruling that it is entitled totax-free status, the purchasing associationamended its articles of incorporation toprovide that its members must be publicschool districts or other governmententities that meet the requirements ofCode Sec. 115. In its request, the entityidentified current members that did notmeet this test and promised to terminatethose memberships by a specified date.

The article amendments also providethat the entity may not issue shares ofstock nor declare or pay dividends. Also,while reasonable compensation can bepaid to individuals for services rendered,no part of net earnings may inure to thebenefit of any director, officer or otherindividual. In the event of dissolution,any remaining assets after liabilities arepaid will go only to member governmen-tal units on the basis of the prior threeyears’ patronage.

IRS decisionIn granting favorable tax treatment,

IRS held that the entity meets bothrequirements to qualify for Sec. 115 taxstatus. First, IRS notes that its only

function is to procure goods and servic-es at more competitive prices for itsmembers. IRS found this to meet thetest of performing an essential govern-mental function within the meaning ofCode Sec. 115(1).

Second, IRS notes Code Sec. 115also requires that any income mustaccrue to a state or political subdivisionthereof. IRS finds that “...incomeaccrues to its members through the pro-curement of goods and services for itsmembers.” It also points out that upondissolution, assets remaining after liabil-ities are satisfied can be distributed onlyto qualified members on a pro rata basisand earnings cannot be distributed toprivate persons. Under these conditions,the entity’s income also meets the test ofaccruing only to states and political sub-divisions thereof.

IRS concludes that so long as theentity operates as represented and cleansup its membership rolls by the datepromised, it will be eligible for CodeSec. 115 tax treatment on that date. ■

Government purchas ing co-ops operate tax f ree

S

L E G A L C O R N E R

IRS held that theentity meets bothrequirements toqualify for Sec.115 tax status.

By Sheri Aldape,

USDA Farm Service Agency

orth Dakota farmers helpfeed the nation and theworld with the crops andlivestock they produce.Now, under the umbrella

of the North Dakota Farmers Union(NDFU), they are taking it another stepforward: they are going to cook up thefood and dish it out at their own restau-rant in Washington, D.C. The newestablishment, called Agraria, is slatedto open this summer in Georgetown, aprimary nightlife and upscale shoppingarea.

Agraria was originally going to openin Baltimore’s Inner Harbor, but thatplan was eventually shelved in favor ofthe Washington locale. If successful, itis hoped that this will be the first of anumber of such farmer-owned restau-rants around the nation.

The project was first conceived in2002 as part of the work on an NDFUproject called the Ultimate Value-Added Cooperative. Planners saw bene-fits for NDFU members in owning arestaurant that could gain a marketingedge by promoting the fact that itsmeals are derived from family farmers.The restaurant will also provide anopportunity to educate consumersabout how their food is grown.

The restaurant is wholly owned byAgraria LLC, a North Dakota-basedlimited liability company. NDFU,organized as a farmer-owned coopera-tive, currently owns about 60 percent ofAgraria, but that share will be reducedas more family farmers purchase sharesand become direct owners, as manyhave already done.

The company has aseven-member board ofgovernors, of whichNDFU President Robert Carlson isserving as interim president. Carlson, agrain and oilseed farmer nearGlenburn, N.D., was also an organizingmember of the Dakota Growers PastaCo., in which he remains an activemember. He is also a former member ofthe USDA-Agricultural Trade AdvisoryCommittee for Grains & Oilseeds, andrecently traveled to China and Japan todevelop niche markets for NorthDakota commodities.

Direct marketingFarmers are eager to capture more

profits from direct marketing, says TomPrescott, the project manager and presi-dent of the Magnate Group LLC, thedevelopment firm for Agraria. Runningparallel to that is the desire of manyrestaurants to source more of their fooddirectly from the farmers who grow orraise it. “So this takes it to the next level— allowing farmers to participate in theownership structure of the business.”Information on various farmers and the

foods they provide will be available atthe restaurant.

“Farmers are important, not just inthe overall industry that provides thefood on our tables, but also as a vitalfabric of the American way of life,”Prescott says. “So it’s very important forthis business to serve an educationalpurpose by promoting farmers, in termsof their work and daily life, and thesecurity they bring to the food system.”

Having the first restaurant open inWashington is a great opportunity toshowcase the family farmer to impor-tant decision makers in the nation’s cap-

ital since “every state in the unionis represented by their congres-sional members here,” Prescottnotes. Washington is also a hubfor business and industry leadersfrom around the globe.

The District was also attractivebecause it is a major tourist desti-nation and is home to a relativelytransient population that dinesout more frequently than average.The D.C.-area population alsohas higher-than- average dispos-able income. All of this adds up tomaking it one of the nation’sfastest growing restaurant mar-kets.

If Agraria restaurants open inother cities, Prescott says thecooperative, farmer-owned character ofthe business will stay intact.

Room with a view The 14,000-square-foot restaurant,

located in the Washington Harborcomplex in lower Georgetown, willhave a beautiful view overlooking thePotomac River. The décor, beingdesigned by the award-winningAdamstein & Demetriou architecture


A Movable Feast North Dakota farmers aim to add value and educate consumers with D.C. eatery

N

firm, will be modern, while still grounded in the roots ofthe family farmers who own and supply it. The restaurantwill seat 355 people, but that number can change depend-ing on table configuration and private events.

The cuisine will be contemporary American, with someItalian and French influences. Since the food will besourced from farmers from across the country, the menuwill have the ability to change daily to ensure that thefreshest products are used.

From 30 to 60 percent of the food initially served atAgraria will be sourced from family farms. In time,Prescott says the percent of food sourced directly fromfamily farms will increase. He also hopes to secure foodfrom co-ops in the Washington, D.C., area.

“The seasonal aspect is always an issue you have to con-tend with here. When the weather warms, right at the timethat we are opening, it will be a prime opportunity for usto source from local farmers. We also encourage farmers tocontact us regarding products that they are offering so wecan discuss sourcing from them,” Prescott says.

The restaurant will also look to source seafood fromthe Chesapeake Bay to attain the highest quality productspossible.

Chef linking with farmers

When trying to pick aname of the restaurant,“Agraria” was the natu-ral fit. It is Latin for“one of the fields, orlands,” which was feltto be applicable tofarmers’ way of life andto best reflect therestaurant’s slogan:“From our fields toyour tables.”

Paul Morello, thehead chef, was recom-mended for the jobbased in part on hisbackground of workingwith farmers and

obtaining products from farmers markets. Morello, whohas been featured in several publications for his cuisine,was previously an executive chef at Les Halles, a Frenchrestaurant in D.C.

Morello has been talking to Pennsylvanian farmers whowill supply food for some “exotic” dishes, and has met withNorth Dakota farmers who will supply flour for his home-made gnocchi and lasagna. Morella is also using Americancheese from Wisconsin and Idaho, and he plans on usingNorth Dakota beef, lamb, pork, potatoes, honey and sugar.

Agraria, he says, is “a chef’s dream.” ■

Agraria’s Executive Chef Paul A. Morello was selected notonly for his culinary art, but because of his experienceprocuring food from farmers markets and co-ops. Dishesseen above are his Mozzarella and Tomato Salad and Tunaau Poivre. Photos courtesy Agraria/North Dakota Farmers Union



he Agri-Mark dairy coop-erative, Methuen, Mass.,and the Allied Federationof Cooperatives — a fed-eration of 26 small co-ops

in New York — have voted to joinforces.

About half of Allied’s 800 membersare expected to join Agri-Mark over thenext several months. Three Alliedmembers have been named to Agri-Mark’s 17-member board, and a fourthmay be appointed. Rather than calling ita merger, the two co-ops say they are“joining forces” as one cooperative,under the Agri-Mark name, to wieldgreater marketing and political muscle.

“The farmers of both the AlliedFederated Cooperatives and Agri-Markhave voted to come together to protectthe region’s dairy industry and work forhigher farm milk prices,” the two co-ops said in a joint statement. “As dairyfarmers, we need to work together topreserve what we have left of ourregional industry,” says Mike Barnes, adairy farmer from Mount Upton, N.Y.,who serves as Allied’s board chairman.

“This joining of our organizationsmakes us a stronger cooperative thanever before,” says Carl Peterson, aDelanson, N.Y., dairy farmer whoserves as Agri-Mark’s chairman. “Fromnorthern Maine to Vermont, and fromSouthern Connecticut to Western NewYork, we are going to continue to bethe voice of the Northeast dairy farmersand represent them in the marketplaceas well as in state legislatures andWashington, D.C.

“While other companies are closingdairy plants in the region and investingin mega-plants in California and New

Mexico, Allied/Agri-Mark has more than $75million invested in fourdairy processing plantsin New York, Vermontand Massachusetts toprovide a milk market,maintain stable pricesand generate value-added products underthe award-winningCabot and McCadambrands of cheddarcheese, butter and otherdairy products,”Peterson noted.

“We’re making a realfinancial commitment tothe Northeast,” he con-tinued. “Our goal isbetter dairy markets and better long-term farm milk prices. Farm prices havebeen up and down the past several yearsand when you couple that with plantsclosing, you can see why farmers haveto work together like never before.”

The small co-ops that operatedunder the Allied umbrella are dissolv-ing, with most members choosing tojoin Agri-Mark, although there is noobligation to do so, says Bob Welling-ton, Agri-Mark’s senior vice president.Most of the new member-farms are inthe northern tier of New York, stretch-ing from Syracuse to Plattsburgh.

By late April, more than 300 formerAllied members had already joinedAgri-Mark directly, including 95 per-cent of those in the Northern Tierclose to its Chateaugay facility. Another50 to 100 more in the central part ofthe state are expected to join in the nextseveral months as their cooperatives

dissolve, according to Agri-Markspokesman Douglas DiMento.

Though the Allied FederatedCooperatives will cease to exist, Barneswill continue to serve as chairman untilthe transition is completed over thenext several months. Agri-Mark hadroughly 1,250 farmer-membersthroughout New England and NewYork, with more than 500 of its farmersin the Empire State. As of May 1, thecooperative had 1,530 member farms,with more than 775 in New York.

Agri-Mark bought the McCadamCheese processing plant in Chateaugay,N.Y., in 2003 when its foreign ownerannounced plans to close the facility.The 150 members of the formerChateaugay Cooperative also joinedAgri-Mark at that time. Agri-Mark hassince been marketing additional NewYork milk and investing in the McCadambrand on behalf of its dairy farmer-owners. ■

Agr i-Mark , Al l ied Federat ionda i ry co-ops jo in fo rces

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Adding salt to McCadam’s New York Cheddar cheese boostsflavor and helps control the aging process. Agri-Markbought the plant in 2003 when its foreign owners announcedplans to close it. Photo by Doug DiMento, courtesy Agri-Mark

Aurora Co-op pursuing newethanol, ag-bio multiplex projects

The Aurora Cooperative, Aurora,Neb., and Aventine Renewable EnergyHoldings Inc. have signed a letter ofintent to develop a new ethanol plantone mile west of Aurora. In its firstphase, the plant will produce100 million gallons per year,but plans call for laterexpansion to 220 milliongallons annually. Theethanol plant is to be con-structed on a 135-acre site,called Aurora West, adjacentto the Nebraska EnergyLLC ethanol plant, of whichAventine is the majoritypartner/owner. The plantwill be owned by Aventine,while Aurora Cooperative will be theexclusive grain supplier to the new facili-ty, as well as the exclusive marketer ofsyrup and wet distiller’s grain with sol-ubles (WDGS). A starting date is still tobe determined.

In addition to the ethanol plant, theproject will include what co-opPresident and CEO George Hohwielercalls “the first ag-bio multiplex inNorth America.” The site will include astate-of-the-art grain-handling facility, afertilizer complex and a double-looprailroad system to accommodate grain,fertilizer, ethanol and DDG shipmentsaccessing the Burlington Northern-Santa Fe (BNSF) mainline railroad.The multi-million bushel grain facilitywill receive and deliver area producers’grain to end users in the ethanol, feedand food industries. The fertilizer com-plex will have the ability to expand,based on the continued market growthAurora Cooperative is experiencing.

Aurora West will also be home to a

75,000-square-foot warehouse leased bySyngenta Seeds Inc. which will occupysix acres and have capacity for 500,000units of seed corn. “The Aurora Westproject, with its contemporary, multi-dimensional uses, has the possibility ofbecoming the cornerstone for a vision-

ary, ag-bio research and developmentcampus that Congressman TomOsborne has supported for years,”Hohwieler added. Total value of themultiplex could exceed $250 million.

Wisconsin governor vetoesnew state cooperative law

Wisconsin Governor Jim Doylevetoed Assembly Bill 327, which wouldhave created a new form of corporateorganization, the unincorporated coop-erative association. “I agree with theintent of the legislation — to helpcooperatives raise needed capitalthrough non-patron investment part-ners,” Doyle said. “However, the billcreates a tax consequence that wasunintended by the authors and support-ers of the bill. Although unintentional, I cannot sign a bill with consequencessuch as these.” Doyle said he will beworking with the state legislature andsupporters of the bill to pass a versionin the current session that achieves the

goals of the proposal, without the cre-ation of this tax consequence.

The Wisconsin Federation ofCooperatives (WFC) says it is disap-pointed by the governor’s veto, which itsaid would create a second Wisconsincooperative law modeled after laws

recently enacted in Minnesotaand Iowa, among other states.The bill was intended to pro-vide an opportunity for newbusiness development inWisconsin. “While we do notagree with the position takenby the Department of Revenue,WFC appreciates GovernorDoyle’s commitment to pass anew version of the bill in theremaining days of the 2006Legislative Session,” WFC said

in a statement issued by President BillOemichen and Chairman Ed Brooks, ofForemost Farms USA.

The Wisconsin Farmers Union hasbeen leading the opposition to the bill.WFU President Sue Beitlich, a dairyfarmer in Vernon County, says the bill“would allow cooperatives to form withas little as one patron and as much as 70percent financing from corporateinvestors...The proposed change in co-op law cuts the heart out of the mem-ber-controlled cooperative,” she wrotein an editorial posted on the WFUwebsite, adding that it “contains noprotection for existing cooperatives andcould open the door for foreigninvestors to sink cash into patron-owned cooperatives.”

CWT fee raised to 10 centsto counter surging milk supply

To generate more funds to address asurge in U.S. milk production that isbeginning to depress farm-level prices,


N E W S L I N E

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A computer-generated conceptual rendering of what the newethanol plant and ag-bio multiplex near Aurora, Neb., may look like.

members of Cooperatives WorkingTogether (CWT) have voted to doublethe program’s five-cent per hundred-weight assessment. The higher assess-ment will begin on July 1, 2006, andrun through 2007.

“We’ve demonstrated in the pastthree years that CWT can help dairyfarmers address a supply-and-demandimbalance, but we need more leverageas we look ahead into 2006 and 2007,”said Jerry Kozak, president and CEO ofthe National Milk ProducersFederation (NMPF), which managesCWT. Milk production was up 3.5 per-cent last year and continues to growrapidly in 2006. Kozak said that thefarmer-funded self-help program“risks being irrelevant in the market-place if we don’t have sufficientresources to do what farmers expectof us.”

CWT’s current budget does notcontain sufficient revenue to fundadditional herd retirement rounds,Kozak said. The higher assessment, tobe collected starting in July, will bringin the additional money needed over 18months to continue both the herdretirement program and the ongoingexport assistance program. Even withthe higher assessment, Kozak expectsthe level of overall participation inCWT will remain at 74 percent of thenation’s milk supply.

“Every one of CWT’s 49 membercooperatives, along with the hundredsof individual farmers paying into theprogram, recognizes that the stakeshave gotten higher as the extent of thesupply/demand imbalance has grown,”he said.

In addition to voting for a higherassessment, CWT’s members also mod-ified several other of the program’s fea-tures, including: • The regional safeguard levels in the

Northeast, Southeast and Midwestwere raised to 0.75 percent of eachregion’s annual milk production, upfrom 0.5 percent.

• Whole milk powder (WMP) wasadded to the list of dairy products eli-gible for export using CWT bonuses.Additionally, Mexico, a major market

for WMP, was added to the list of eli-gible destinations for that specificproduct.

• The target price for cheese under theexport assistance program was movedfrom $1.40 per pound, to $1.30. Thetarget butter price remains at $1.30per pound.

Sun-Maid girl turns 90with digital TV ads

The Sun-Maid Girl, famous for herred bonnet and for holding a tray offreshly picked grapes, is receiving a dig-ital make-over on her 90th anniversary.This American icon is taking on an ani-mated form in nationwide television

commercials, print adver-tising and on a newlydesigned website:www.sunmaid.com. It was90 years ago that a young

girl named Lorraine Collett posed forthe raisin and dried fruit co-op’s trade-mark in Fresno, Calif. Her likenesswould become one of the world’s bestknown trademarks and the cornerstoneof Sun-Maid’s packaging and advertis-ing.

“Set to turn 90, the Sun-Maid Girldeserves a new look for the new centuryand our continued mission of sharingthe benefits of naturally delicious raisinsand other dried fruits with consumers,”says Barry Kriebel, president of Sun-Maid, in Kingsburg, Calif. “We’reexcited with the resulting televisioncommercials, which put a modern spin

on our message that raisins are “justgrapes and sunshine.”

The animated Sun-Maid Girl andthe new television commercials are thework of Synthespian Studios, NorthAdams, Mass. Founded in 1912, Sun-Maid Growers is the world’s largestproducer and processor of raisins andother premium quality dried fruits.Sun-Maid’s raisin sales of over $200million and 200 million pounds annual-ly are approximately half “Sun-Maid”retail consumer products and halfingredient products for such items ascereals, breads, and a variety of otherfood products.

USDA announces $43.7 millionin rural broadband system loans

USDA Rural Development hasissued three loans totaling $43.7 millionto provide broadband service to an esti-mated 41,000 rural households andbusinesses in four states. “Broadbandservice provides an economic engine forrural communities, which opens thedoor for business development,improved health care and additionaleducational opportunities,” saidThomas Dorr, agriculture under secre-tary for Rural Development. “Theinfrastructure built with these funds isan investment in the future of theserural communities.”

The loans were made to BroadbandSouth, which will serve 64 communitiesin southeastern Georgia and Florida; toJaguar Communications Inc., to serveeight counties in Minnesota; and toMid-Hudson Cablevision in New YorkState to bring improved and advancedservice to seven rural communities.

The Rural Development BroadbandAccess loan program authorizes USDARural Development to make loans todeploy broadband service to communi-ties with a population of 20,000 or less,with first priority going to communitieswithout broadband service. The loansare low interest and allow for the tech-nology to be market driven.

The Rural Development BroadbandAccess Program has made 56 loans formore than $868 million since the pro-gram was created in 2002.


The Sun-Maid girl (above) has gone digitalin the co-op’s new TV commercials.

DFA re-opens Michigandairy processing plant

Dairy Farmers of America Inc.(DFA) has re-opened a dairy processingplant in Adrian, Mich., previouslyowned by Diehl Inc. City officials andDFA employees celebrated the plant’sopening March 13 during a special rib-bon-cutting ceremony. The plant,which has been idle since October2005, received its first delivery of milkon March 14. The plant will create 25new jobs.

“Adrian is a great processing locationbecause it is located in an area wheremilk production is increasing,” saysGlenn Wallace, chief operating officerof DFA’s Mideast area. “DFA membermilk production in Michigan has grown9 percent a year for the past two years,and we expect that trend to continue.”DFA plans to process more than 16.5million pounds of milk into condensedmilk, cream and non-fat dry milk pow-der each month at the plant. A process-ing capacity of over 60,000 gallons perday will help to balance the growing sup-ply of milk being produced by DFAdairy farms in Michigan.

The plant will allow DFA to processthe excess milk that is produced duringthe spring and summer months.Previously, the milk had to be hauledout of Michigan to customers as faraway as Kentucky or Wisconsin.Wallace says that the cooperative andits members should realize significantsavings in transportation costs.

Kansas co-op director on Today Show Larry Hoobler, a board member for

Farmers Union Cooperative BusinessAssociation in St. Mary’s, Kan., and hiswife Diane, were featured on NBC’sToday Show on April 27. They partici-pated in a “City-Country Life-Swap”segment, which contrasted life in the

Big Apple (Manhattan, N.Y.) with theLittle Apple (Manhattan, Kan.)

Trying out country life was SarahDiMuro, a New York City-born andraised woman in her twenties, who hadnever spent time out of the city. Whileon the farm, she milked a cow, sheeredsheep, rode in the tractor and plantedsweet corn. Meanwhile, the Hooblersnavigated the subway system and wentto a New York City nightclub. Theyalso took over some of their counter-

part’s work duties as apersonal assistant.

How did they get solucky? The KansasCooperative Councilreports that four yearsago the Hooblers wereincluded in an MSNBCshow on the 9/11 terror-ism attacks on America,and how they affectedagriculture. The pro-ducer, who spent time attheir farm to prepare forthe show, is now a pro-ducer for the TodayShow. When this story

came up as an idea, he said he knew justwho he wanted to cast!

California’s Central Valleylosing best farmland fastest

Most counties and major cities inCalifornia’s Central Valley are failing tomake significant progress at preservingfarmland in one of the nation’s mostimportant agricultural regions, accord-ing to a new American Farmland Trust(AFT) study. Many of the high-valuefruit, nut and vegetable crops grownhere cannot be grown anywhere else inthe United States. “Though local landuse plans are well-intentioned,” saidEdward Thompson, Jr., AFT’sCalifornia director, “the best farmlandis being paved over the fastest, and theland is being developed very inefficient-ly in terms of the amount of land usedfor each new resident. It’s a waste of aprecious resource.”

The AFT study, covering 11 coun-ties from Sutter to Kern, found thatduring the 1990s, 53 percent of the97,000 acres that were urbanized washigh-quality farmland, and that forevery eight new residents, an entireacre of land was developed. Urbandevelopment in the Bay Area is abouttwice as efficient, and in SouthernCalifornia it is almost three times asefficient. AFT also found that“ranchettes,” rural residences on largelots, are a particular threat to agricul-ture. This fragmentation poses a seri-ous risk to agriculture, not onlybecause of the potential for conflictwith intensive farming operations, butalso because it helps to drive the priceof farmland above what farmers canafford, the AFT report notes.

Current building trends will lead tothe loss of another 900,000 acres offarmland, more than doubling today’sdeveloped area. By 2040, the loss ofagricultural output due to land con-version could top $860 million peryear. Though there is still an opportu-nity to save a significant amount offarmland, AFT warns that, unlesscounties and cities encourage moreefficient development, the CentralValley will reach a “tipping point”


DFA workers celebrate the re-opening of a milk plant inAdrian, Mich. Previous owners idled the plant last October.

Green Acres in reverse: Manhattan, Kan.,farmers Larry and Diane Hoobler got ataste of life in the other Manhattan onNBC’s The Today Show.

beyond which it will become too diffi-cult to reach that goal. “The politicalwill to change,” said Thompson,“becomes harder every day that thestatus quo prevails.”

The AFT study titled “The FutureIs Now: Central Valley Farmland atThe Tipping Point?” is available onlyon the Internet at: www.farmland.org.

Overseas investors purchase controlof farmer-owned ethanol plant

Members of Lakota, Iowa, ethanolproducer Midwest Grain Processors

Cooperative, the majority owner ofMGP LLC, voted in late March to sell60 percent of the business to GlobalEthanol Holdings of Brisbane,Australia. The vote was 717 to 348 infavor of the sale, a vote which repre-sented 83 percent of the co-op’s nearly1,300 members in10 Midwestern states.

This $100 million sale will provideshareholders with $3.23 per share nowand another 20 cents a share within twoyears, and marks the first time an Iowafarmer-owned ethanol plant has beensold to a foreign investor, according to a

report in the Des Moines Register. Theoffer sparked concerns about the statelosing control of a home-grown indus-try. The Register quotes David Nelson, aBelmond farmer and MGP chairman, assaying the sale will clear the way formore outside money to come intoIowa’s ethanol industry.

The company plans to double ortriple the 100-million-gallon ethanolplant at Lakota and a 57-million-gallonplant under construction in Riga,Mich., according to a statement issuedby MGP on March 30. The company is


vate companies and even with interna-tional companies.

The changes in state laws are mostlybeing undertaken to accommodate flexi-bility on capital formation. When farm-ers come together to form a business,whether it is for soy processing orethanol production, they want to accessfarmer capital and outside capital. Inorder to do that, these laws are providingmore flexibility to attract outside capital.

I don’t see anything bad about that aslong as the best interest of the farmersand producers on a co-op basis is beingserved. I would guess that you will havea lot of co-ops that will look at these dif-ferent structures to see if they will helpaccomplish their goals. It is really beingdriven more by the need for capital for-mation than anything else.”

Q. With such a large, complex business,what steps does CHS take to ensure you getboard members with the kind of skills need-ed to direct it successfully.

Toelle: “Our Member Services Dept.provides extensive training in the coun-try for local co-op directors. Throughour communications, we also provideeducation for local directors. Thatbecomes the platform where theybecome experienced on the local level,and creates opportunity to seek nomi-nation to the CHS board.

When we become CHS board mem-bers, there is extensive, on-going educa-tion. Every year, our board participatesin education at both the local co-op and

corporate-governance levels. We usetraining programs of the NationalAssociation of Corporate Directors andthe National Council of FarmerCooperatives.”

Johnson: “Election to our board is atotally democratic process; we don’tcontrol who runs for board. It reallytakes the best of the best to get on thisboard. We make sure directors have agood understanding of the environmentwithin the industries we operate in.Four or five times per year, we bring inindustry experts to provide an outsideperspective and share their views ofthese industries. Because we are globalin outlook, each year we take about athird of the board on an internationaleducational trip.”

Q. Mike, any tips on being a good boardmember and maintaining good relations onthe board and with management?

Toelle: When you are a producerwho also serves as a director, you can-not come to a meeting with your ownpersonal business interest in mind. Youneed to make decisions that are best forthe organization. Many times you willbe faced with making a decision thatmight not be best for your area or yourfarm, but you need to make a decisionbecause it’s best for CHS.

Foster a teamwork approach to mak-ing decisions — teamwork amongboard members and between the boardand management. Treat people withrespect, even when you disagree.

Another key to the success of CHS isthat we — the board and management— work very hard to be open and trans-parent. We’ve had that culture for manyyears, and it creates a high level of trustwith our members, our business part-ners and customers.

Q. How do you keep the pulse of whatmembers want from CHS, and has thischanged significantly during your tenure?

Johnson: “Communications and lis-tening to members is a core value forthis company, and plays a key part inbuilding our business plan. We do thatin a number of different ways. We havea Members Services group that is linkedto local boards and management on amonthly basis, and deals with businessesstrategies and developing managementskills. We have boards that are heavilyinvolved in director associations.

“I spend a fair amount of time in thecountry at manager association meet-ings. We do 13 mid-year-report meet-ings, the idea being to go out to ourmembers midway through the year andprovide them an update on how thecompany is doing, rather than surprisethem at the end of the year with goodor bad news. This usually involves anoperations report, as well as an exten-sive workshop and question-and-answerperiod. So there are a number of differ-ent touch points at the local board ormanager level to make sure we have asense of what their needs are and whatchallenges are facing them.” ■

CHS at 75: Looking back, looking forward continued from page 11


the next level of financial management,”said Abbey Ariong, the project’s super-visor of cooperative and business devel-opment services. “Once our role oftraining in how to use the software on aday-to-day basis is done, we will thenbegin training them on analysis of thedata.”

The common system not only willenable the client cooperatives to do amore professional job accounting fortheir funds, Ariong said, but will alsoallow for comparisons among groupsand the development of industry normson profitability per liter and othermeasures.

Proper handling and milk safety areother major issues for cooperatives,many of which operate milk collectioncenters where members take their milkfor bulking and chilling prior to pick upby processors. The major centers havecapacity in the range of 15,000 to25,000 liters. The system is essentially aspoke-and-hub system, with smallercollection centers in the countrysidefeeding into the larger centers. Themilk is transported in 50-liter stainlesssteel cans delivered on everything fromtrucks to bicycles.

Land O’Lakes provides assistance to

the centers on the proper hygienic han-dling of the milk. Training in standardmilk testing procedures has been con-ducted to improve the milk quality andensure the product is safe for con-sumers.

Improving products, productionAssistance to dairy processors gener-

ally focuses on improving existing prod-ucts and production methods, as well asnew product development. As with U.S.cooperatives, many Ugandan processorsare looking for ways to increase theirprofitability through value-added prod-ucts. The technology for making prod-ucts like yogurt and ghee (a semi-liquidform of butter) is relatively simple andoffers a realistic means of utilizingexcess milk and boosting profits.

The project also has played a majorrole in generic marketing for the dairyindustry, which is not large enough tohandle that function on its own.Generic marketing is one of the pro-ject’s biggest components. A few yearsago, the slogan: “So have you had milktoday?” was adopted for the industry.Similar to the milk campaign in theUnited States, a series of posters wereproduced featuring prominent

Ugandans promoting the consumptionof milk.

Other marketing activities includeradio and newspaper advertisements,sponsorship of local Dairy Days and thenationwide June Dairy Month, and var-ious market research activities. Based onmarket research, emphasis is now beingplaced on targeting activities to specifi-cally reach young people in Uganda.

These include advertisements in theweekly educational supplement of thetwo daily newspapers, implementing awall-painting competition at 100schools in and around the capital city ofKampala, and providing assistance toprocessors who have targeted schools asone of their primary market areas.

Uganda’s dairy industry has madegreat strides over the past 10 years, butthere is much more that can be done.The Land O’Lakes project will contin-ue to work to increase the income offarmers in the program, increase thesize of the formal market in relation tothe informal sector, improve the rangeand quality of products, and explore thepotential for Uganda to become a majorregional exporter of milk and otherdairy products. ■

Bottling Hope in Africa continued from page 15

also pursuing construction of a 100-mil-lion-gallon plant in Illinois. Nelson saidfarmer owners have an opportunity tocontinue to grow their investment inthe business alongside Global Ethanol.Those who voted against the sale notethat the crucial difference will be thatfarmers will no longer be in the drivers’seat, and much of the profit from oper-ations will go overseas, rather than backinto the rural Iowa economy. Theopponents of the sale said they didn’thave enough time to convince otherinvestors that the deal wasn’t goodenough to give up local control.

Foremost Farms USA earns $4.8 million in ‘05

Foremost Farms USA had netincome of $4.8 million in 2005, down

from $28.3 million in 2004, on totalsales of $1.4 billion — the same totalas in 2004. “The dairy industry isconfronted with some severe econom-ic challenges,” said Duaine Kamenick,the cooperative’s vice president-finance. “Commodity prices continueto fall as milk production is increas-ing. This combination will likelyresult in lower prices for manufac-tured products in 2006, which willdrive lower prices paid to milk pro-ducers.”

Foremost President DaveFuhrmann said, “2005 was certainly avery different year than 2004.However, Foremost Farms’ balancesheet is strong and we are in a positionto meet challenges facing the dairyindustry.”

The cooperative’s current ratio was$1.45 in current assets to $1 in currentliabilities. Member-owners who mar-keted their milk through ForemostFarms USA during 2005 will receive apatronage allocation of $5.2 million.

Foremost, based in Baraboo, Wis.,manufactures many varieties of cheese,whey and whey ingredients, packagedfluid milk, sour cream, butter andchilled, ready-to-serve fruit juices. Inaddition, the cooperative sold milk tofluid milk handlers in four federal milkmarketing orders.

Lansdale new CEO forOregon Hazelnut Growers

Hazelnut Growers of Oregon(HGO) has named Compton Chase-Lansdale as its new president and

CEO, who replaced retiring presidentand CEO Len Spesert in March. “Compton brings to HGO a deepgeneral management and marketingbackground, having worked with bothdomestic and international agribusi-nesses and food manufacturers,” saidJeff Koenig, HGO chairman. “He hasheld executive positions with corpora-tions such as the NutraSweet divisionof Monsanto, the Pantaleon S.A. sugarrefining group of Guatemala, andmost recently AVEBE of Holland, alarge farmers’ cooperative and thedominant potato starch manufacturerglobally.” Koenig noted that the newCEO possesses the mix of manage-ment skills, cooperative knowledgeand international expertise HGO

needs “to continue our strong finan-cial performance and global marketgrowth.”

LO’L Finance Co. turns 25with 11th year of loan growth

Land O’Lakes Finance Co. recentlymarked a quarter century of providingfinancing to agricultural producers. Thewholly-owned subsidiary of ArdenHills, Minn.-based Land O’Lakesopened its doors Dec. 17, 1980, to helpfinance agronomy receivables for localcooperatives, as well as offer financingfor LO’L dairy and poultry producers.Serving a growing base of customershas been the goal of the business eversince.

Dennis Bottjen, president and CEO,

says the company had loan volume of$177 million in 2005, and that loan vol-ume has increased in each of the past 11years. The company has been profitablein all 25 years of its existence. Thecompany’s customers reside in 28 states,stretching from New York toCalifornia. Swine makes up the largestsegment of the company’s loan portfo-lio. Cattle and dairy comprise the nextlargest industries, respectively. Thecompany’s portfolio also includes cus-tomers involved in aquaculture andpoultry.

CHS director Keppynamed to FSA post

CHS Inc. board member GlenKeppy — who represents the co-op’s


existing plants and facilities. Furtherexpansion occurred during the 1970sand 1990s.

Agricultural cooperatives differenti-ate themselves from other suppliers bytheir service orientation. The MiddleEast oil embargo of the 1970s led coop-erative suppliers such as CF andFarmland Industries to make customerneeds paramount.

They would not only provide a reli-able source of fertilizer in time forspring planting, but would also havesufficient inventory to fill orders shoulda severe shortage arise.

Protecting members was a strongdimension of CF’s organizational cul-ture and member-owners respondedwith loyalty. “We stayed in that allianceno matter what,” one co-op officialcommented.

Loss of flexibility is a drawback ofthe “ownership equals control” strategy.The commitment to protect membersby providing assured domestic suppliesreduced CF’s profitability.

High inventory carryovers resultedfrom the commitment to guarantee thatmembers would not run out of fertiliz-er, raising CF’s cost of production overtime.

Reluctance to source offshoreRegional cooperative ownership of

domestic fertilizer assets minimizedopportunities for CF to sell outside ofthe cooperative network. Farmer-mem-bers were also sometimes hesitant to seetheir cooperatives invest in offshore fer-tilizer assets. CF had an operating lossof $311.3 million in 2004 (RuralCooperatives).

The geographic advantage of differ-ent regions for fertilizer productionchanges over time, depending on theprice of natural gas, a primary feedstockfor fertilizer. During the late 1990sthrough 2003, high U.S. natural gasprices triggered fertilizer import pricesto fall below the U.S. cost of production.The energy crisis of the 1970s led to acooperative norm of assuring supply “nomatter what.” Yet, some 30 years hadpassed without another supply crisis.

Meanwhile, the fertilizer industryhad globalized. U.S. or other NorthAmerican companies were increasinglyengaged in offshore production, bring-ing a degree of control and security tothe U.S. industry through these invest-ments. The growth of China and Brazilcontributed to making the fertilizertrade international, further lowering theprobability of supply restrictions.

Farmers once had resisted importedproduct because of texture or color.Over time, however, the quality ofimports had improved to be commensu-rate with domestic product. Questioningsupply reliability had become less neces-sary for cooperatives as their size andmarketplace clout grew. As major cus-tomers, their needs would be met.Loyally making purchases from CFwhen a competitor was closer or cheap-er ultimately created losses for CF’sowners.

These developments changed coop-erative norms. In 2002, CF reassessedits corporate mission and chose toemphasize its financial performanceover guaranteeing an assured supply toits owners. “Taking care of customersno matter what means you lose money,”one co-op manager said. Others com-mented: “Why am I competing for thisbusiness; if the other supplier has a $10transportation rate, he should get thebusiness.” “I can’t afford to service thatlast truckload,” is more important than,“I will never run out of product.”

The conversion of CF was anacknowledgement by its owners thatownership of fertilizer assets was not aprerequisite to securing fertilizer sup-plies. CF has begun to resemble the

Conversion Debate continued from page 20

members in Iowa, Missouri andArkansas — has been appointed byPresident Bush as associate administra-tor for the USDA Farm Service Agency(FSA). In his new position, Keppy willoversee management of FSA farm andfarm loan programs and commodityoperations.

“Glen’s expertise in agriculture willmake him a valuable member of theUSDA team,” said Johanns. “I lookforward to welcoming Glen, a fellowIowa native, and I’m confident he willadvance USDA’s commitment of serviceto our farmers and ranchers.”

Keppy and his family have ownedand operated a diversified crop and live-stock family farm in eastern Iowa for 34years. He brings both local co-op aswell as international perspective to FSA,

having traveled extensively to promoteU.S. agricultural exports in various for-eign markets.

Keppy, who has been a CHS directorsince 1999, will submit his resignationfrom the CHS board, at which time adecision will be made on how toaddress the vacancy. Keppy has alsoserved as chairman of National PorkBoard’s Foreign Trade Commission;president of the National PorkProducers Association and vice chair-man of the Iowa Ag Value Committee,among others.

Book examines life of Wisconsin co-op leader

“Truman Torgerson, LeadershipStraight from the Shoulder” is the titleof a new book about the co-op leader

whose efforts played a key role in theformation of the Lake to Lake DairyCooperative. It also focuses on “anintense period of dynamic organization-al change in American agriculture” anddocuments Torgerson’s efforts to “con-stantly seek institutional improvementsin governance and representation offarm interests.”

In addition to his work with Lake toLake, Torgerson was also a board mem-ber of Land O’Lakes, the WisconsinCouncil of Agriculture and the NationalMilk Producers Federation, where heexercised his leadership in defining suc-cessful principles, practices and policiesfor continuing operations and the better-ment of the industry. Written by his son,Randall Torgerson, the former leader ofUSDA’s cooperative program, the book


“hunter” cooperative described byRhodes, seeking new customers andactivities whenever a profit seems likelybecause retaining the organization’soriginal purposes and members willresult in lack of growth, or even decline(Rhodes:161).

CEO’s key roleCooperative conversion offers a

commentary on a growing split betweenmembers and cooperatives that wouldhave been unthinkable in the era whencooperatives were routinely regarded asan extension of the farm. Conversionrepresents an “arm’s length” relation-ship with former members that maybegin in stages as the needs of the prod-uct brand — or the brand’s customers,such as retail chains — begin to relegatethe farmer-owners of the cooperative toa secondary role. The farmer-owners ofthe cooperative can become non-com-petitive within their own organizationbecause they don’t produce enoughproduct (in the case of Calavo) orenough equity (Diamond Walnut) tosupport the growth of the productbrand.

Just as conversion represents aninternal threat to cooperative stabilityand coherence, the solution to creepingprivatization is also internal. Protectingthe market share of producer-members

starts with the selection of a CEO whois willing to make this commitment.

Maintaining producer loyalty was acritical issue for cooperatives in theNourse era of multiple cooperativescompeting for the producers’ business.In the contemporary era, some coopera-tives have tried to “think outside thebox” of cooperative values and recruitCEOs from outside the cooperative sec-tor. Maintaining the loyalty of the CEOto cooperative values in an era of global-ization and supply-chain economics maybe a new challenge for cooperative mem-bers, but it is one within their control.

References• Chaddad, Fabio R. and Michael L.

Cook, The Economics ofOrganization Structure Changes: AUS Perspective on Demutualization.Annals of Public and CooperativeEconomics 75:4 2004, pp.575-594.

• Diamond Executives Due Stock at$.001 per Share. Cooperative BusinessJournal. July/August 2005, p.12.

• Hardesty, Shermain D., The BottomLine on the Conversion of DiamondWalnut Growers. University ofCalifornia Giannini FoundationAgricultural and Resource Update,Vol. 8, No. 6, July/Aug 2005.

• Hogeland, Julie A., New GenerationCo-op, Limited Liability

Corporation, Value-Added,Demutualized: What is Still“Cooperative” about AmericanAgricultural Cooperatives?Presentation to “The Contribution ofCooperatives to CommunityCulture,” XXI InternationalCooperatives Research Conference,Cork, Ireland, August 12, 2005.

• Morgan, R. M. and S. D. Hunt. “TheCommitment-Trust Theory ofRelationship Marketing.” Journal ofMarketing 58 (1994): 20-38.

• Nourse, E. G. (1978). “The Place ofthe Cooperative Community in OurNational Economy” Reprint fromAmerican Cooperation 1942 to 1945.Journal of Agricultural Cooperation, 7(1978): 105-111.

• V. James Rhodes. “Large AgriculturalCooperatives: On the Road toWhere.” Cooperative Theory: NewApproaches. United StatesDepartment of Agriculture,Agricultural Cooperative Service,ACS Service Report Number 18, July1987, pp. 155-170.

• Stanford, Lois and Julie A. Hogeland,Designing Organizations for aGlobalized World: Calavo’s Transitionfrom Cooperative to Corporation.American Journal of AgriculturalEconomics 86 (No. 5, 2004):1269-1275.■

includes remembrances from more than95 contributors. For more information,visit: www.AuthorHouse.com.

Farm labor co-op signs agreement with UFW

The Agricultural Labor Cooperativeof America (ALCA), a cooperativerecently formed to provide laborers toits members, signed an agreement inSeattle on April 11 with the UnitedFarm Workers of America (UFW) andGlobal Horizons Inc. (a Los Angeles-based farm labor contractor), underwhich the three organizations willcooperate to provide laborers to farm-ers. The agreement “creates a franchisethat will allow our member farmers tohave access to productive, accountableand reliable agricultural labor,” ALCA

President Pat Grant said in a statementissued following the event. “We believethat this new franchise, PAR Labor,formed from H2A workers who will beUFW members, is a giant step forwardin helping mitigate the shortage of farmlabor in the United States.”

Grant said ALCA believes that theUnited States faces a shortage of asmuch as 500,000 farm workers for thecurrent growing season. The goal of theagreement, he said, is to simplify theprocess of securing laborers who are“highly trained, process-focused andcompliant with all current immigrationregulations.” Workers will “know thattheir wage and benefits condition meetsand exceeds all the requirements setforth in the current H2A visa tempo-rary worker program.”

National Beef to acquire Brawley Beef LLC

National Beef Packing Co. LLC,Kansas City, Mo., and its majorityowner, U.S. Premium Beef LLC(“USPB”), have entered into a non-binding letter of intent to acquireBrawley Beef LLC. Brawley Beef is analliance of cattle producers in Arizonaand California who supply its meatpacking operations with more than400,000 animals per year. The companyproduces upscale custom cuts to retailcustomers. Brawley Beef was formed byits suppliers in 2001 and operates inBrawley, Calif., with a new state-of-the-art beef processing facility.

National Beef is the fourth largestbeef processing company in the UnitedStates. ■


Four named to Co-op Hall of Fame

Four cooperative business leaders were inducted intothe Cooperative Hall of Fame in May during a ceremonyat the National Press Club in Washington, D.C. TheHall of Fame recognizes those who have made “heroic”contributions to cooperative enterprise. The newestinductees are: • Frank Morton Hunt II, a lifelong leader of the Florida

citrus industry and an advocate for strengthening serv-ice to co-op customer-owners. He is the retired presi-dent of Hunt Brothers Cooperative, Lake Wales, Fla.,and a past chairman and president of Citrus WorldInc., which owns the Florida’s Natural orange juicebrand. He also played a major role in shaping theFarm Credit System when the Banks for Cooperativeswere consolidated into CoBank in the 1980s.

• Thomas L. Lyon, retired CEO of CooperativeResources International in Shawano, Wis., a member-owned holding cooperative of three subsidiaries thatprovides artificial insemination services for livestock.He is a leader in the state, national and internationalcooperative communities and has a passion for co-opdevelopment and education. He is a former chair ofthe University of Wisconsin Board of Regents and atrustee of the Ralph Morris Foundation, TheCooperative Foundation and the CooperativeDevelopment Foundation.

• David O. Miller, a farmer, businessman and directorfor Nationwide Insurance, a mutual insurance compa-ny in the Fortune 100. He is a cooperative advocate in

the local, regional, national and international arenas.As a board member of the International CooperativeAlliance, he has also been the leading American in theinternational cooperative community.

• Rebecca Allen (deceased) was co-founder of ParentCooperative Preschools International (PCPI),Kensington, Md. A teacher, editor and adviser in earlychildhood education, Allen believed in the co-op busi-ness model and in parent participation and control ofeducation. She organized PCPI, an association ofcooperative preschools, in 1960. She helped launch theHead Start program in the 1960s.

The Cooperative Hall of Fame was established in1974 by the National Cooperative Business Associationand is housed at its offices in Washington. It can also bevisited on the web at: www.heroes.coop. ■

Cooperative Hall of Fame inductees, from left: Tom Lyon,Rebecca Allen (represented by her daughter, Lucy Allen), DaveMiller and Frank Hunt.

50 Years Ago…From the May and June 1956 issues of News for FarmerCooperatives

Bulk milk handling challenge Dairy cooperatives face a challenge in converting to bulk

milk handling. “A cooperative’s success is measured largely interms of the degree to which it provides services demanded andneeded by producers. Producers need and (in many cases) areasking their cooperatives for assistance in solving problemsassociated with bulk handling methods. In converting to bulkmilk handling, cooperatives have many tasks facing them. Bysetting up a successful system, these co-ops can make savingsfor their members in four principal ways: through the improvedquality of the milk, reduced transportation costs, reducedreceiving costs and reductions in the loss of milk and butterfat.”

Small rabbit co-op does good business Demand for rabbit meat in the United States has been

soaring, from 6 million pounds in 1935 to about 50 millionpounds in 1950. Helping to meet that demand is the VirginiaRabbit Market Cooperative in Roanoke. The co-op beganbusiness in 1934 with seven rabbit breeder members, withsales that year of less than 1,000 pounds live weight. Thesemembers were breeding rabbits chiefly for show purposes.But they found themselves with extras and they started look-ing for a market for these healthy young, edible rabbits. In1934 it wasn’t easy to sell rabbits for food because of the dan-ger of contracting tularemia (rabbit fever). But as the yearspassed, consumer demand for rabbit increased tremendously.By 1955, co-op membership had climbed to more than 450members in West Virginia, North Carolina and Virginia.

CCA moves supplies to 500,000 farmers Maximum transportation services at minimum costs are an

aim of Consumers Cooperative Association (CCA), KansasCity, Mo., a large regional supply cooperative serving close tohalf a million farmers in nine Midwestern states. Its farm sup-plies move by rail, steamship, waterways, trucks and pipelines.Farmers have a right to expect their cooperative wholesalers tokeep transportation costs to a minimum and, at the same time,provide maximum services. CCA’s members are concernedwith the movement of supplies from the purchase of raw mate-rials through processing and manufacturing, storage and intra-plant handling, packing and shipping and on to delivery tolocal member associations for distribution to farmers.

30 Years Ago…From the May and June 1976 issues of Farmer Cooperatives

Energy to determine status as world power “At least 10 issues must be resolved if the nation is to solve

its energy problems,” Robert D. Partridge, executive vicepresident and general manager of National Rural ElectricCooperative Association, told a group of cooperative associa-tion editors. If the nation cannot solve its energy shortages, itruns the risk of perhaps eventually becoming a “fourth- orfifth-rate world power.” The 10 issues include: (1) dependen-cy on oil from abroad; (2) failure to conserve energy; (3)necessity of shifting more to electricity; (4) commitments torapid cleanup of air and water; (5) accelerated research anddevelopment of alternative sources of energy; (6) reliance onprice as the regulator of the energy field; (7) lack of govern-mental commitment and determination to develop a nationalenergy policy; (8) factor of public fear and doubt; (9) monop-oly in the basic fuels industry; and (10) need for education.

MFC to produce, market Mississippi’s ‘Super Food Bar’ A “super food bar” developed by Mississippi State food

specialists has created a new role for MFC Services, a region-al farmer cooperative based at Jackson, Miss. MFC has beenselected by Mississippi State College Board as sole interna-tional production and marketing agent for the super food bar.The board selected MFC because the cooperative already hadthe marketing machinery and expertise to make the productavailable worldwide. Iran is planning a school food programand the Shah is interested in a high-protein food supplementto be included. The Shah’s specifications call for: individuallywrapped snack bars that provide 200-300 calories of protein,that no refrigeration be required and that cost per serving be18 to 20 cents. The team came up with four types of foodbars: brownie, toffee, oatmeal and sweet potato, with oatmealbeing the flavor most favored in Iran.


P A G E F R O M T H E P A S T

From the archives of Rural Cooperativesand its predecessor magazines

May and June 1956 issues


Indiana co-op’s 50th year gilded by records “Indiana’s largest agricultural gathering — drawing about

15,000 people — observed the golden anniversary of IndianaFarm Bureau Cooperative Association Inc. The 50th annualmeeting was the setting for special observances and reports ofthe cooperative’s record year in sales and net savings during1975.” In commenting on the annual meeting’s theme of “50Years in Progress,” Harold P. Jordan, special assistant to thegeneral manager and recently retired as the cooperative’sgeneral manager, noted that agriculture’s advance “did notcome by accident or good fortune. It came about because alot of people on the farm, at Purdue University, in USDAand in this and other cooperatives worked together to makeagriculture more efficient, to produce more wholesome,nutritious food for consumers and to provide more adequateand equitable income for farmers.”

10 Years Ago…From the May/June 1996 issue of Rural Cooperatives

Sound co-op business ethics “Cooperatives were generally organized on a community

basis where social relations, such as kinship and friendship,provided a basis of trust,” explains Paul Lasley and C. PhillipBaumel in an article on ethical standards for co-ops. “Earlycooperative leaders recognized that they needed to sharplydifferentiate themselves from traditional private sector busi-nesses. A key ingredient to achieving cooperation wasestablishing rapport and building trust with and amongproducers. The early organizing efforts stressed theimportance of farmer control, honesty, integrity andhigh ethical standards. This attention to honest busi-ness practices and treating all patrons fairly attractedmany new members. Trust and commitment to ethicalbusiness practices provide the basis for cooperation andare essential for people to join together and work formutual goals. Without trust, people do not communi-cate and cooperation is unlikely.”

Harvest States’ Texas mill ahead of schedule “Construction of a new, 10,000-hundredweight flour

mill in Houston, Texas, to serve cooperatives is ahead of

schedule thanks to dry weather during the early stages ofconstruction, according to Harvest States Cooperatives of St.Paul, Minn. The mill is being built for Amber Milling Co., adivision of Harvest States. It will process hard-red winter andspring wheat to produce bread flour. The Houston mill is thesecond of three new, hard-red winter wheat mills to be builtby Harvest States and Amber Milling to bring more of thefood dollar back to member-producers. Unlike the coopera-tive’s mill at Kenosha, Wis., which has adjoining grain stor-age tanks, a nearby grain elevator operated by the HoustonPort Authority is available for unloading and storing incom-ing grain. The site is served by two rail lines.”

Health network enhances services in mountain “A combination of rising health care costs and cutbacks in

health and social programs at both the state and federal levelhas left many rural communities struggling to maintain orestablish needed health care facilities and related social servic-es. When the health of our rural population is negativelyaffected, it increases the odds of a general economic downturn.A healthy community may be able to withstand an economiccrisis, but when health services are eroding, economic stress iscompounded and the viability of rural communities is threat-ened. The reduction or elimination of many costly health andhuman services programs could have a severe impact on ruralAmerica. To plan for eventhe best-case scenario inthis setting, rural communi-ties need to be innovativeand collaborate. They needto begin planning now, ifthey haven’t already doneso. Eagle County, Colo., isdeveloping an innovative,shared-services agency thatoperates on cooperativeprinciples and is surmount-ing these negative trendsand improving the deliveryof health and human servic-es to its residents.” ■

May and June 1976 issues

May/June 1996 issue


By Jack Gleason,

Acting Administrator

USDA Rural Development Business and CooperativePrograms

nergy is a key part ofPresident Bush’s domesticagenda, and one of thenewer loan guarantee pro-grams available through

USDA Rural Development is theRenewable Energy and Efficiency loanprogram. These loans are designed toencourage agricultural producers andsmall rural businesses to create renew-able and energy-efficient systems.

Two generations of the Neppel fami-ly operate Neppel Farms Inc., inArmstrong, Iowa, a 2,000-acre, grainand livestock farm, which includes a3,400-head sow confinement operationand 16,000 hogs. It also markets 200cattle annually.

Faced with an annual electric billfrom their livestock operation thatexceeded $200,000 per year, theNeppels decided to pursue their ownwindmill after taking a closer look attwo wind turbines of the nearby SpiritLake School district.

The farm received a $402,500 Re-newable Energy Systems grant fromUSDA Rural Development to install a1.5 MW wind turbine. It also received a$250,000 interest-free loan from theIowa Energy Center and a loan for thebalance from their local lender. Totalproject cost was $1.6 million.

In addition to help from USDARural Development staff in Iowa, theNeppel family also worked with a pro-

fessional grant writer. The 1.5 MW tur-bine went on-line in August, 2004, andis now producing close to 5 millionkilowatt-hours of electricity annually,enough to light up 400 Iowa homes fora year. The electricity is being pur-chased by Alliant Energy under a long-term contract. The family calculatesthat is should achieve return on invest-ment in 15 years.

The Neppels say the best way toavoid or limit start-up problems is tomake sure you “work with a first-classcontractor” with a solid track record.They also advise securing power-pur-chase and interconnection agreementsearly in the process, and to secure awarranty and maintenance contract.Their success with wind power is alsoprompting interest from others in thearea to put up their own turbines.

Another example of a successful

energy start up is in the town ofLuverne, Minn., where Agri-EnergyLLC is located. This company is locat-ed in the southwestern corner ofMinnesota, surrounded by corn andsoybean farms.

This project began producingethanol in 1998 as a 12-million-gallon-per-year dry-mill plant using 10 millionbushels of corn annually from its mem-bers. In 1998, USDA Rural Develop-ment provided a Business and Industryloan guarantee on a $5 million loan toconstruct the plant. This project wasthe first of its kind in Minnesota.

Three years later, Rural Develop-ment was approached by anotherlender, Heartland Business Bank ofWisconsin, to guarantee another $5million loan to refinance debts at alower rate and to expand the ethanolplant. The company has continued toperform in an exceptional manner.Agri-Energy currently has about $24million in annual sales.

This plant employs local residents,buys approximately 10 million bushelsof corn per year from local farmer-members and increases their income byselling a value-added product derivedfrom corn.

USDA Rural Development is a ven-ture capital source for rural Americaand has $17 billion to invest in the ruraleconomy this year. For more informa-tion on the Renewable Energy andEfficiency program or our other guar-anteed loan programs, contact a RuralDevelopment office in your state, whichyou can find listed on our website:www.rurdev.usda.gov. We look forwardto working with you. ■

Wind, b io fue l p ro jec ts funded

I N S I D E R U R A L D E V E L O P M E N T

Paul Neppel and his family used aRenewable Energy Grant from USDA/RD to erect this windmill on their Iowafarm. USDA photo by Kate Evans

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