Rural

COOPERA COOPERATIVES

USDA / Rural Development May/June 2006

CHS: 75 and Still Shining

page 4

CHS: 75 and Still Shining
On July 2, 1926, President Calvin Coolidge signed the

Cooperative Marketing Act into law, formally launching the

federal government’s role in assisting farmer-owned cooperatives. Although USDA first assembled data on farmer co-ops

in 1901 and launched its first official cooperative project in

1912, it was the 1926 Act that really got the show on the

road. The first of the program’s subsequent “homes” was the

Division of Cooperative Marketing within USDA’s Bureau of

Agricultural Economics. For six years in the 1930s, it was

even housed in the Farm Credit Administration before

returning to USDA. 

Rather than a regulatory program, the framers of the law

envisioned it as a program that would provide education,

research and technical assistance to help farmers help themselves. Eighty years later, this mission continues, although

Mr. Coolidge and Co. would certainly be amazed by the radical transformation of the nation’s rural (and urban, for that

matter) areas. The number of farmers is, of course, greatly

reduced, and the size of the average farm has greatly expanded. But the marketing and other challenges facing farmers are

more formidable and complex than ever, and hence the performance of their cooperatives is still vital.

To see how a co-op can evolve and grow along with the

farm economy, just turn to the coverage on page 4 of this

issue to read about CHS Inc. as it marks its 75th anniversary.

The history of CHS and its predecessor co-ops is, in many

respects, also the history of agriculture and co-ops in the

Midwest and Northwest. 

Examples of innovative medium and small size co-ops are,

of course, also featured in every issue of this magazine and

demonstrate how flexible the co-op model is. Strategic

alliances and joint ventures among co-ops, new-generation

co-ops, use of co-op subsidiaries, co-ops with international

members and using outside equity to supplement farmers’

equity are examples of this flexibility. Co-ops are industry

leaders in identity preservation, niche marketing, development of new products and services and other ways of providing member support. 

Despite the passage of 80 years, the scope of activities

Congress directed USDA to help farmers pursue through coops still serves as a road map to the types of endeavors farmer

co-ops are engaged in today. The Act directed service to be

provided to associations, federations and subsidiaries of agricultural producers “engaged in cooperative marketing of agricultural products, including processing, warehousing, manufacturing, storage, cooperative purchasing of farm supplies,

credit, financing, insurance and other cooperative activities.” 

The Act has seven subsections, which direct the following

activities to be undertaken:

• Promoting knowledge of cooperatives principles and practices and cooperating with educational and marketing agencies, cooperatives and others in promoting that knowledge;

• Making special studies in the United States and foreign

countries and acquiring and disseminating information and

findings useful in the development and practice of cooperatives;

• Gathering, analyzing and disseminating economic, statistical and historical information about cooperative business

methods;

• Studying economic, legal, financial, social and other phases

of cooperation and publishing the results; 

• Surveying and analyzing accounts and business practices of

cooperative associations...and publishing summaries of

results to guide other cooperatives in developing methods

of business and marketing analysis;

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

• Employing qualified commodity marketing specialists to

summarize and analyze the information and disseminate it

to cooperatives and others.

After 80 years, should the Act be updated? Some have suggested expanding the scope to include all types of cooperatives, not just agricultural cooperatives. Should the role of the

program – now housed with USDA Rural Development – be

expanded to include other types of producer-owned agribusinesses (such as the producer-owned LLCs gaining popularity

in the biofuels industry)? 

These and other questions and issues concerning the

future of producer-owned and other types of cooperatives

will need to be resolved as co-ops position themselves to provide the types of services their members need in order to

prosper. ■

— Dan Campbell, Editor 

2 May/June 2006 / Rural Cooperatives

COMMENTARY

80th Anniversary of Cooperative Marketing Act 
Rural Cooperatives / May/June 2006 3

Rural COOPERATIVES (1088-8845) is published

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To file a complaint of discrimination, write to USDA,

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Avenue, S.W., Washington, D.C. 20250-9410, or call

(800) 795-3272 (voice), or (202) 720-6382 (TDD). USDA

is 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, or

Fax (202) 720-4641, Information Director,

This publication was printed with vegetable oil-based ink.

Rural COOPERA COOPERATIVES

May/June 2006 Volume 73 Number 3

p. 4

p. 14

p. 17

p. 22

FEATURES 

4 CHS at 75: Looking back, looking forward

By Dan Campbell

12 Montana forest fuel collection 

business wins USDA grant

By Tyler Christensen

14 Bottling Hope in Africa

Land O’Lakes providing boost to Ugandan dairy industry

By Todd Thompson

17 Co-op Conversions

Extent of commitment to co-op values key factor in decisions 

By Julie Hogeland

22 A Movable Feast

N.D. farmers to add value and educate

consumers with D.C. eatery

By Sheri Aldapi

24 Agri-Mark, Allied Federation

dairy co-ops join forces

DEPARTMENTS

2 COMMENTARY

16 VALUE-ADDED CORNER

21 LEGAL CORNER

25 NEWSLINE

33 PAGE FROM THE PAST

35 INSIDE RURAL DEVELOPMENT 

On the Cover:

On the Cover: Looking a little like flickering birthday cake candles, is

CHS 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: dan.campbell@wdc.usda.gov

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

CHS Inc. is observing its 75th anniversary

this year as much more than just a survivor. It is

a diverse and growing Fortune 200 agribusiness

with $11.8 billion in annual sales. It serves 1,100 local cooperatives with 325,000 member-producers and is poised to

pursue promising new industries. 

The success of CHS is testament to the power of what a

producer-owned agribusiness can accomplish with the right

business strategies and the support of its members. From the

fuels it refines and supplies to member cooperatives, to the

grain it mills into flour and the oilseeds it processes into vegetable oil-based foods, CHS strives to make sure producers

get the supplies they need to produce a crop, then adds value

to those crops to help return more farm dollars to producers

and their communities. 

CHS predecessor co-ops were founded during the Great

Depression, when farming was literally a life-or-death struggle for local co-ops and their producers. Farmers — then as

now — looked to their co-ops as crucial business partners

whose success or failure was inexorably linked to their own.

The nation’s newly mechanized agriculture industry was

increasingly looking for a dependable, fairly priced source of

fuel. Farmers also needed strong cooperatives to get their

grain to market and to return a good price for it. 

Cenex (or Farmers Union Central Exchange) was established in St. Paul, Minn., in 1931 to supply farmers with fuel

and other vital farm supplies. For grain handling, farmers

formed North Pacific Grain Growers Inc. (NPGG) in 1929

in Lewiston, Idaho, and Farmers Union Grain Terminal

4 May/June 2006 / Rural Cooperatives

CHS at 75:

Looking back, looking forward

S

CHS at 75:

Looking back, looking forward
Association (GTA) in 1938, also in St. Paul. These are the

three “rootstock” co-ops from which CHS sprouted.

NPGG and GTA merged to create Harvest States

Cooperatives in 1983. Harvest States in turn merged with

Cenex in 1998 to create CHS Inc. (The 1931 founding of

Cenex is being used as the official birth date for the combined organization.) There have been many other mergers

with smaller co-ops along the way (see the CHS Milestones,

page 8) as the co-op has grown and evolved to meet the

changing needs of its members and the marketplace.

In a wide-ranging discussion with Rural Cooperatives in

early April, CHS Chief Executive Officer John Johnson and

Board Chairman Mike Toelle, a producer from Browns Valley,

Minn., talked candidly about the past and

future of CHS, and what its continued success means to their members and rural

America. 

Q. What lesson should we derive from the

fact that CHS has lasted for 75 years? 

Mike Toelle: The basic business philosophy that has helped us through 75 years

of success is the same one that is imperative as we move into the future. Really, it’s

very simple: always focus on the organization as a whole and make the best decisions for the co-op and its members. This

requires a disciplined approach in the decisions you make in the board room. You

might not be able to solve all the problems

of your members, so you need to focus on

those issues that you can address, positioning 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 measurement of that: in 2006 we returned $151 million in cash

including patronage and equity redemptions — a record.

That is another type of added value that flows back to our

members and their communities from this cooperative.

Q. CHS has grown through mergers, perhaps the biggest being

the Cenex-Harvest States merger. What factors made that a good

fit, and what were the biggest problems to be resolved to make it

work?

John Johnson: “The process started in late 1997 and concluded in June of 1998. There

was about a 90-percent overlap

in the membership of the two

companies. When we looked at

the future of agriculture, it

became pretty clear to us that

integration between the supply

side of the business and the marketing and processing side would

be in the best interest of producer-farmers. Leadership — boards

and management — endorsed

the vision for coming together. 

Some mergers don’t work, but

this had a lot of strategy behind

it and alignment with leadership.

All the stars lined up to create a

very successful merger. From

there, it was all about execution

of the strategy. The two CEOs

— Noel Estenson at Cenex and

myself at Harvest States — were

totally aligned regarding what we

had to get done to organize the

new company. We divided the duties — Noel took

on more of the political and board work, while I

took on more of the operational aspects. This gave

us the focus we needed to execute the merger in a

relatively short period of time, with very few hiccups.”

Q. Some of your local co-ops have grown substantially in recent years, some even attaining the designation

of “super local” with $300 million or more of sales

annually. How does this change the role of CHS in

meeting their needs?

Johnson: “Consolidation on the retail side has

been ongoing and probably has accelerated in the

last 5-6 years, resulting in some “mega” local coops. The unification of Cenex and Harvest States

really helped us become a better provider of supplies and marketing to them. Size and scale

Rural Cooperatives / May/June 2006 5

Transporting members’ grain to market by river barge, trucking farm supplies to

local co-ops and providing on-farm fuel delivery are just three of the many services CHS performs for its members. All photos courtesy CHS 
become very important when we serve

co-ops of that size. The merger of

Cenex and Harvest States was an

enabler for a lot of other co-ops to consider mergers. A lot of co-ops that were

purely supply or purely marketing have

been able to unify their efforts to

become an integrated supply and marketing co-op, just as we have done.”

Toelle: “On the supply and output

side of the business, when we put Cenex

and Harvest States together, we looked

at them as complementary businesses

that would be better poised for the

future of agriculture as one co-op. I

believe that is what also happened at

the local co-op level.” 

Q. CHS has taken over direct management of some local co-ops that were struggling. How has that been working out? 

Toelle: We’ve not only taken over

some challenged co-ops and retail locations, but in many cases local producers

have simply decided to merge with

CHS to gain added efficiencies from its

administrative and support services.

Their equity is now directly in CHS

rather than in their local association.

We call these CHS Country Operations, and it has worked very well. 

They still operate just like a traditional local co-op, with a local board

and governance and local management.

That said, this model is not for everyone. Some people really like it — it has

been particularly popular in Montana.

But others want more independence. 

There has been slow but steady

growth in the program. More requests

come in every month; some of them

happen, some don’t. Many co-ops needing to make a change in their business

still decide to merge with a larger

neighboring co-op down the road and

remain a part of CHS through their

local. What CHS is offering is ownership options. Local producers have to

do the research and make a decision

based on what best serves the interests

of their producers. 

Q. The biggest co-op failure in history

occurred a few years ago when Farmland

Industries collapsed. What lessons did you

draw from that tragedy?

Johnson: “Don’t ever let it happen!

It was an absolute shame. It comes down

to some very sound principles of running your business. Some people have

the idea that it failed because it was a

co-op. That is furthest from the truth.

Really, it was due to business failures in

a company that was driven very heavily

by size — dollar sales volume

meant everything to Farmland.

They leveraged their balance sheet

to accomplish that objective, then

got into some business cycles that

were disastrous for them. 

We want to grow, but to grow

on a profitable basis. Our discipline is to make sure our balance

sheet stays strong, which means

the relationship with our bankers

remains strong. This enables you to

ride-out business down-cycles.

Farmland got heavily leveraged over the

previous 10 years. Then, when a bad

cycle hit — in their case it was fertilizer

and petroleum that were really in the

tank — they didn’t have the wherewithal to get through it. 

There is also a business culture issue.

We have a philosophy to undersell and

overdeliver. You should try to create

realistic expectations, whether with

your owners or bankers. Farmland had

a culture that would lead members and

bankers to believe that they were going

to achieve all these fantastic results, and

then never achieved them. 

Again, I’m a firm believer that it

wasn’t their co-op business model that

created their failure, but it was some

business decisions that they made in the

10-year window prior to their failure

that caused it.”

Q. How aggressively has CHS been able

to move into Farmland’s former trade territory, especially in places such as Kansas

and southern plains states?

Johnson: “Big time! It is our highest

“We’re doing 

what the market 

is demanding: producing more energy

products... as well 

as reinvesting in 

renewable fuels.” 

6 May/June 2006 / Rural Cooperatives
growth area, for both farm supply and

grain, although farm supply is growing

even faster. Farmland’s failure created

an absolute void — from a co-op presence perspective — in those markets.

Some of those co-ops were finding

other partners during that time, private

companies that stepped in there and

created alternatives for them. We had

been there for a long time, but we then

really stepped-up efforts to provide a

co-op solution for those local co-ops.”

Q. Have you encountered much anti coop fallout, with producers saying: “We don’t

want to deal with any more co-ops?” 

Johnson: “I don’t think so. There is

still a very strong co-op philosophy in

those markets. But

there is more of a

“show me” attitude.

Union Equity also

failed in that area,

and then Farmland

came in and eventually failed. So there

is a track record of

regional co-ops there

not being successful.

But they were still

looking for a co-op

partner. We have

demonstrated that

we can deliver what we say; and there’s

a lot of security around our equity and

equity-revolvement plan.” 

Q. Petroleum has been the biggest

income earner for CHS in recent years.

What is the outlook for that part of the

business, and are there any plans to expand

refinery capacity or acquire oil reserves?

Johnson: “We hold no oil reserves

— we are purely a refiner and marketer.

We buy crude oil from outside, both

domestically and globally.

Most of our business units have been

doing quite well, many having had

record years. But you’re right, our earnings the last few years on refining margins have been at points we’ve never

seen before in our history. We’ve reinvested back in these plants. We’ve made

sulfur-reduction upgrades at both of our

refineries — at Laurel, Mont., and

McPherson, Kan. We’ve spent about

$400 million doing that and, in the

CHS’ Venture Foods subsidiary, one of the nation’s leading processors of oil-based foods, has returned more than a 30-percent

return on equity since formation in 1996. Opposite page: CHS CEO

John Johnson, left, and Board Chairman Mike Toelle.

CHS Inc. is a diversified, federated cooperative in the

energy, grains and food products businesses. It had 2005

sales of $11.8 billion and net income of $250 million. It

has 6,370 employees. CHS is owned by farmers, ranchers

and local cooperatives from the Great

Lakes to the Pacific Northwest, from the

Canadian border to Texas. 

Major business divisions include:

• Grains — CHS markets more than 1 

billion bushels of grain annually in 60

countries, making it the nation’s largest

cooperative grain handler. It operates

many grain terminals and retail facilities.

• Foods — CHS is a leading processor of

value-added foods. Its Ventura Foods,

LLC (with partner Mitsui & Co.) is a

leading manufacturer of margarines and butter blends,

salad dressings, sauces and vegetable oils. Horizon

Milling (a joint venture with Cargill) is the nation’s leading flour miller and supplier of durum wheat. CHS

Oilseed Processing refines more than 1 billion pounds

of soybean oil annually. CHS Sunflower serves more

than one-third of the domestic kernel and in-shell market and export markets. 

• Energy — CHS is the nation’s largest cooperative

gasoline and diesel refiner and a significant wholesaler and reseller of refined fuels. The Cenex convenience store chain is one of the nation’s 20 largest, and

it is the fifth largest propane retailer and produces a

wide range of lubricant products. It operates refineries

and pipelines, has its own truck fleet

and is now one of the largest suppliers

of ethanol-enhanced gasoline and markets of biodiesel. 

• Agronomy — Through Agriliance LLC, a

joint venture with Land O’Lakes, CHS

markets crop nutrients and protectants

to producers through local cooperatives and independent dealers in the

United States, Canada and Mexico. 

• Country Operations — CHS operates

300 local farm supply and grain facilities, providing ag inputs, grain marketing and other supplies and services. 

• Business solutions — CHS is a full-service brokerage

and risk management provider through its subsidiary,

Country Hedging Inc. and its 60-some branch offices.

Through Ag States Group, it offers insurance and group

benefit programs; it provides business consultation

services to 1,400 local co-ops.

• Animal nutrition — CHS supplies livestock feed and

services from the Central U.S. to Pacific Northwest

with Payback brand feeds. 

CHS: a snapshot

Rural Cooperatives / May/June 2006 7
process, we also got rid of some bottlenecks to improve capacity. 

Now we’re spending $325 million at

Laurel, Mont., on a coker — a bottom

refiner that converts asphalt into more

refined fuel products. It will increase

capacity of the plant by about 14 percent. 

We’re also taking a lot of the money

that we’ve been earning and reinvesting

it in renewable fuels. We’ve invested

about $70 million in a renewable

fuels/ethanol production company. By

the end of 2007, it will have an annual

capacity of about 550 million gallons,

making it the second largest ethanol

producer in the United States. So, we’re

doing what the market is demanding:

producing more energy products and

doing it by tweaking current plants for

extra capacity, as well as reinvesting in

renewable fuels.” 

Q. Any plans to increase your 28 percent

share in ethanol producer U.S. BioEnergy? 

Johnson: “Our share floats around a

bit. Since making our investment in

November 2005, they have added a

number of locally organized co-ops that

had been building ethanol plants, and

have now merged into U.S. Bioenergy.

With the last round of mergers, our

ownership dropped down to 24 percent,

so we invested another $35 million of

capital into the business. Now we are a

24-percent owner of a much larger

company than when we had 28 percent

of it. I expect to stay stable there for the

next year or so.”

Q. Is biofuels hurting some of your local

grain co-ops by taking away corn volume? 

Johnson: “I wouldn’t say that it’s like

a loaded gun to their heads, but it is

hurting some. Ethanol is now eating up

as much corn as the export market. And

this is a phenomenon that has happened

in just the last five years. So a lot of

grain facilities that typically handled a

high volume of grain for export are

finding corn instead going for ethanol. 

From our perspective, and that of a lot

of our locals, there are two sides of the

business: one is grain export, the other

is domestic demand for grain, as well as

farm supply. That diversification at the

local level will give them tremendous

staying power going forward. The market is telling us it wants more corn production. This year the numbers didn’t

come out like I thought. But there is a

lot of new seed genetics technology that

will expand corn production — maybe

in geographic areas where we don’t

grow a lot of corn today.” 

Q. Does biofuel compete with CHS

petroleum?

Johnson: “They tie together very

well. There is some uniqueness there

for CHS. We probably are one of the

only ethanol producers that are

involved in fossil fuels refinement. We

are also the only fossil-fuel refiner that

is directly involved in ethanol produc8 May/June 2006 / Rural Cooperatives

Milestones: How CHS became CHS

1929 North Pacific Grain Growers, Inc.

(NPGG) is organized as a regional cooperative, based in Lewiston, Idaho, with 60

affiliated local cooperatives. 

1931 Cenex — the Farmers Union Central

Exchange — is founded in St. Paul, Minn.

1938 Farmers Union Grain Terminal

Association (GTA) opens in St. Paul, with

121 local affiliated cooperatives. 

1938 NPGG moves its office to Portland,

Ore.

1942 GTA moves into wheat milling with

the acquisition of Amber Milling Co. in

Rush City, Minn.

1943 Cenex purchases an oil refinery at

Laurel, Mont., and acquires a one-third

interest in the National Cooperative

Refinery Association at McPherson, Kan. 

1945 Cenex enters the feed,

plant food and seed business.

Plant food operations are

expanded the next year when it

becomes a major stockholder of

CF Industries. 

1960 GTA purchases the

Honeymead soybean processing plant and

the Archer Daniels Midland elevator line

in southern Minnesota.

1962 NPGG dedicates its new export terminal at Kalama, Wash., on the lower

Columbia River. 

1971 Cenex begins supplying 60 cooperatives in the Pacific Northwest formerly

served by Grange Cooperative Wholesale.

1972 Cenex enters the transportation

business by acquiring Northern

Cooperative Services of Wadena, Minn.

1975 GTA adds a branch office in

Portland, Ore., and opens a barge-loading

terminal on the Mississippi River at

Winona, Minn. 

1977 GTA purchases Holsum Foods of

Waukesha, Wis.

1977 Cenex begins serving Pacific Supply

Cooperatives, adding 67 local cooperatives in Washington, Oregon and Idaho.

1981 Solar Gas is purchased, making

Cenex one of the top 10 propane suppliers

in the nation.
tion. So we are fairly unique. We look

at it as an absolute complement. 

If you look at ethanol producers,

basically they are just that. They process

corn, make alcohol and push it into the

marketplace. What we can do at CHS

— because of our involvement in both

fuels — is link the demand-bases across

a lot of refiners who are facing the mandate to produce more ethanol-blended

fuel. Whether it is Cenex, Exxon-Mobil,

Concoco or Phillips, all these folks need

to buy ethanol. We do exchange programs with them on the refined-fuel

side, so we are the natural supplier for

their ethanol. 

From a consumption viewpoint,

ethanol may be viewed as a somewhat

competitive energy source. But in reality, because of the makeup of our business, it creates an integrated platform

that we can successfully operate from. 

Q. What are the odds that oil prices

could drop sharply and cut the legs out from

under the biofuels industry?Does growing

interest in switchgrass and other non-grain

fuel stocks worry corn producers and ethanol

co-ops?

Johnson: “Long term, biomass technology is probably where it is going to

go. I don’t know if that is 10 or 20 years

out. The technology is not yet very

good. When you think of the efficiencies of converting switchgrass, corn

stover and all the other biomass materials, the question is: how do you collect

those feedstocks economically so that

they can compete with corn? Today,

Rural Cooperatives / May/June 2006 9

1982 Cenex acquires Western Farmers

Association, based at Seattle, Wash.,

making it the largest cooperative supplier

in the Pacific Northwest.

1983 North Pacific Grain Growers and

GTA merge to form Harvest States

Cooperatives.

1987 Cenex joins with Land O’Lakes to

form the Cenex/Land O’Lakes Ag Services

marketing joint venture.

1988 First Cenex convenience store

opens. 

1990 Harvest States’ Holsum Foods division acquires Albert’s Foods, Omaha,

Neb., and Private Brands, Chicago, Ill. The

next year it adds Great American Foods in

Philadelphia, Pa.

1992 Cenex acquires majority ownership

of National Cooperative Refinery

Association at McPherson, Kan.

1992 Harvest States and Continental Grain

enter a joint venture, the Tacoma Export

Marketing Co. (TEMCO) at Tacoma,

Washington, for feed grain shipments to

Pacific Rim countries.

1993 Southwest Grain, Gladstone, N.D.,

regionalizes with Harvest States.

Regionalization is a unique concept pioneered by Harvest States that combines

local control with the services and marketing reach of a regional cooperative.

1994 Harvest States begins construction

of a new mill in Kenosha, Wis., and

assumes full ownership of the Rush City,

Minn., and Huron, Ohio, mills.

1994 Harvest States acquires an export

elevator at Myrtle Grove, La., and a river

terminal at Davenport, Iowa, to strengthen

its capabilities for originating and shipping

grain for export.

1994 Harvest States’ Terminal Agency and

Ag Agency at Cenex/Land O’Lakes combine to form Ag States Agency. The joint

venture represents more than 1,200 cooperatives, making it one of the largest

cooperative insurance agencies in the

nation.

1995 Harvest States and Wilsey Foods, a

subsidiary of leading international trading

firm Mitsui & Co. Ltd., form a joint venture,

Ventura Foods, purchasing a food processing plant at Chambersburg, Pa.

(Continued on page 10)

CHS recently invested more than $725 million in upgrades at its refineries in Montana and

Kansas, and has invested another $70 million in a bio-energy business. 
that really can’t happen. So I don’t view

it as a near-term problem. 

When we look at the spread between

corn values and crude oil prices, I think

that spread will stay there for some

time. If I have a fear regarding ethanol

production, it is around the corn crop.

Corn is at something like $2.25 per

bushel, but if we had a significant

drought across much of the United

States, it could drive corn values to

extremely high levels, like $4 or $5 a

bushel. That could be devastating to

ethanol production. Longer term, looking at averages — with the spread

between corn and crude oil prices — it

is a very good economic model. 

Q. Grain marketing margins seem to

get slimmer all the time. What can CHS

and its members do to improve efficiencies

to make grain marketing more profitable?

Johnson: “Our grain marketing has

been pretty profitable — even stellar

the last couple of years. But on a per

bushel basis, you are exactly right.

Margins are very slim. There again, values we generate from grain marketing

are not dependent on buying and selling grain. That is where you see the

very low margins. Really, CHS is a

logistics provider, which means, yes, we

buy and then sell grain to domestic and

global customers. But the value we

bring is in logistics, risk management

and transportation. We get paid for

that. To me, the low margin you see in

grain trade is a phenomenon of the

business, but the companies that can

provide the other kinds of attributes to

customers can get paid very well for

that.”

Q. What prompted CHS to get involved

in Brazilian soybeans? 

Johnson: “As we deal with global

customers, primarily China — which

now demands about 40-plus percent of

global soybeans — it is pretty evident

that those customers need a supplier

that has dependability 12 months per

year. About half the global supply of

soybeans today is produced in South

America, the other half in North

America. 

We established three origination

offices in Brazil about three years ago.

We walked before we ran, and it’s been

extremely successful. We supply beans

from South America primarily to

Chinese customers. But as soon as we

know we can be competitive selling

North American beans, we are in there

selling them to customers. 

If CHS is going to be a global supplier of grain and services, we have to

be global in our origination — particularly for soybeans.”

Q. Some producers are concerned about

growing competition from Brazil, given low

land costs and wages there. How can we

improve our competitiveness? 

Toelle: One key advantage for U.S.

agriculture is our transportation and

logistics systems, which is second to

none. I’ve been in Brazil, and I can definitely tell you it is a competitive advan10 May/June 2006 / Rural Cooperatives

1998 Cenex and Harvest States unite on

June 1 to become what today is CHS Inc.,

an integrated agricultural foods system

linking producers to consumers.

2000 CHS, Farmland Industries and Land

O’Lakes Inc. form Agriliance LLC, a joint

venture involving the sales, marketing and

distribution of agronomic inputs and service. 

2001 CHS announces plans to form a joint

venture, Horizon Milling LLC., in flour

milling with Cargill Inc., with a total of 21

mills. CHS producers will be the primary

supplier of wheat for the alliance.

2001 CHS announced plans to acquire

Farmland Industries’ share of Country

Energy LLC, an energy joint venture.

2001 CHS announces the public sale of

$50 million in preferred stock in an effort

to diversify capitalization of the co-op.

2002 CHS acquires Agway’s Grandin,

N.D.-based Sunflower business.

2003 CHS opens Harvest States do Brasil

Ltda in Sao Paulo, Brazil, a wholly owned

subsidiary originating and marketing soybeans from Brazil.

2003 CHS preferred stock is listed on

NASDAQ exchange under “chscp.” The

next year CHS uses preferred stock to

redeem $13 million in member equity.

2004 CHS purchases remaining Farmland

Industries share of Agriliance LLC. This

creates a 50/50 joint ownership with Land

O’Lakes Inc.

2005 CHS completes $400 million ultralow sulfur diesel project at its Montana

and 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 in

earnings.

2006 CHS system marks its 75th anniversary and issues a record $151 million

cash and stock disbursement to members.
Rural Cooperatives / May/June 2006 11

tage for the U.S. But there is also a critical need to improve the nation’s waterways, especially along the Upper

Mississippi, where we have locks and

dams that are antiquated. With the rise

in energy costs, rivers are by far the

most efficient method of transporting

grain, farm inputs and other freight up

and down the river. Devoting more

resources to improving our waterways is

a key legislative priority for CHS. 

On the trade front, as we negotiate

on the World Trade Organization, we

need to be very careful not to disarm

ourselves with legislation in a new Farm

Bill that would weaken our negotiating

position. We feel it may well be prudent

to extend the current legislation pending the outcome of WTO talks. 

Q. John, what have been your biggest

successes and disappointments while serving

as CEO? 

Johnson: “I’ve been CEO, or the

equivalent, for 11 years. That’s a long

time for a CEO. The average in corporate America is five years or less. I got

the job at a young age — 44 or 45. So

there have been some of both during

that time.

I feel very proud of the formation of

Ventura Foods in 1996. Here is a company that has generated a 30-plus percent return on equity ever since it started. It was originally a very small organization, but is now one of largest packagers of oil-based food products in the

United States, with 16 plants. And we

did it with an international partner,

Mitsui & Co. of Tokyo. In 1996, business partnerships were relatively new.

Going across the ocean and finding a

partner was somewhat revolutionary at

the time. The company continues to do

well, and our relationship with Mitsui

continues to be extremely strong. It has

allowed us to do other things with partners. It took a lot of work from our staff

to put together. 

An equal, or even greater, accomplishment was the formation of CHS.

Think of it: two of the largest co-ops in

the U.S. were able to look at the future

and had the ability to put together an

organization like this, the 188th largest

company in the U.S. today. And it is

owned by farmers and co-ops. We’ve

been able to put together effective management teams through all the acquisitions and mergers. It’s ultimately all

about people and putting the best possible people on the job to create a winning team. 

My biggest disappointment was certainly that our Mexican foods division

didn’t work out as expected. I had a

vision of expanding our food business

and felt very strongly that we could do

it on our own. It turned out that we

could not.

Mexican foods was a great strategy,

but we failed at it. We bought some

companies at substantial discounts, but

probably got what we paid for. Another

eye opener for us, as well as for a lot of

other companies, is the need to make

sure that you have the skill sets to be

successful in companies that operate in

challenging management environments.

We ultimately came to the conclusion

that we didn’t, so we sold it. When you

are not succeeding, recognize it early

and do something about it. 

I don’t dwell on mistakes. Everyone

in the management world is going to

make mistakes. If you think not, you are

fooling yourself. When you find yourself in a situation where you can’t execute, you make an adjustment and move

forward. We in management — as I tell

the board all the time — have got to be

careful about how hard you punish mistakes. They will happen, because that’s

where innovation comes from — it’s

where people go out and look for new

ways to create value. The main thing is,

you don’t want to make the same mistake twice. But when you make a mistake, don’t live with it forever. Take corrective action and move forward.”

Q. What is on the CHS drawing board

right now that you are most excited about?

Johnson: “Renewable fuels and how

they fit with our company is by far the

highlight right now. It is a very exciting

area that is growing extremely fast.

New plants are being considered each

and every day here. It holds a lot of

value for our member-owners.”

Toelle: “Part of the vision of CHS is

connecting producers with the consumer, and we’ve been doing that on

the food side, especially in grains

through Ventura Foods. When you

think about the renewable fuels platform, it presents another aspect of the

CHS vision: the producer-to-consumer

connection.”

Q. Can CHS and other co-ops help keep

more family farms in business, or is continued drift toward industrial-scale farming

the only real future for U.S. farming?

Toelle: “Through our local co-ops

and country operations, our mission is

to provide value back to producers. We

think we offer a platform of access to

world markets, integration between

supply and grain outputs and food processing. And we drive that value back to

the local level. 

You will continue to have a diverse

makeup of farms in the U.S., depending

somewhat on geography and crop mix.

We certainly spread our value across all

producers. It is up to them to run their

businesses at the size and scale that they

think works for their operation.”

Q. There is much debate about states

adopting new co-op incorporation laws that

allow for a broader definition of what a coop is. What factors are fueling this movement and what does it mean for the future

of farmer-owned co-ops? 

Johnson: “I’m not sure I even know

what a traditional co-op is any more.

There are a tremendous amount of different structures being used, including

by ourselves. We are a traditional coop, but — by the same token — we use

many different capital structures to

accomplish our objectives. An example

is our preferred-stock program that

trades on the NASDAQ. This is fairly

unique in the co-op world. But it doesn’t interfere with our core co-op values

because this is non-voting stock. 

Control and governance of the company stays in the traditional form, with

producers. We use a lot of limited liability corporation (LLC) structures. We

have LLCs with other co-ops, with pricontinued on page 28
By Tyler Christensen 

Montana Missoulian 

Editor’s note: this article is reprinted courtesy of the Montana Missoulian.

t’s easy to find uses for

small-diameter trees and

woody biomass. It’s not so

easy to find a cost-effective way of getting that

material from the forest to the people

who can use it. But Craig Thomas and

his Ravalli County business, All Woody

Resources, are working on a method of

collecting logging debris at the job site

using special container trucks capable of

going wherever logging trucks go —

with the goal of making small-wood

collection in Montana’s forests economically feasible for the first time.

The company’s effort got

a significant boost in April

in the form of a $228,000

check presented in person

by the U.S. Department of

Agriculture’s Undersecretary for Rural Development

Thomas Dorr. The check

was part of $4.2 million in

USDA Forest Service

grants given to 18 small

businesses whose work

helps remove economic

barriers to the use and marketing of woody material,

Dorr told a wind-whipped

crowd at the Johnson

Brothers wood recycling

yard in Missoula.

“Everybody is fully cognizant that small businesses

are the economic drivers of

the U.S. economy,” Dorr said after presenting the check. “I suspect this is

going to be a very successful project, all

because small business people are willing to step in and do their part.”

All Woody will use most of the

money to buy more container trucks

and to launch a marketing program,

said Rosalie Cates, executive director of

the Montana Community Development

Corp., which has been working with

Thomas to test and develop the new

collection method.

Basically, the company uses a system

of trucks and containers to transport logging debris — also called slash — to a

central collection yard near Stevensville,

where the woody biomass is sorted for

sale. This sort of material is usually inaccessible and often burned to reduce the

amount of hazardous fuels in the forest.

By allowing businesses to collect that

material, the forest will benefit from

fewer wildfires and the government will

save money by having less slash to burn.

Also, fewer burns means better air quality — which everyone can appreciate.

“In my book, no matter how you cut

it, that’s a win-win situation,” Dorr said.

However, the financial heart of the

business is the central yard, where the

wood material can be amassed on a sufficient scale to be conveniently and economically picked up, processed or delivered, Cates explained.

Thomas, who counts 30 years in the

forestry business and currently contracts with Johnson Brothers, started

working on the collection system three

years ago with the help of MCDC and

several partner-businesses. After extensive study and testing, they decided on

the current method as the

most cost-effective way to

access the greatest quantity of woody biomass.

“It is actually not the

most economical method

of collecting slash, but it

will work where other

methods won’t,” Thomas

explained.

It’s been used on

restoration projects on

Blue Mountain and Pattee

Canyon, he said, and

proved particularly useful

on Pattee Canyon roads

inaccessible to other

machines.

In fact, logging debris

is inaccessible in about 90

percent of all logged

areas, said Chuck Seeley,

12 May/June 2006 / Rural Cooperatives

Montana forest fuel collection

business wins USDA/RD grant

I

Forest thinning operations – conducted here by Horizon Tree Service and

All Woody Resources — will lessen the threat of a devastating forest fire.

The wood chips will provide fuel for generating electricity. Photo courtesy

Montana Community Development Corp.
griculture Secretary Mike

Johanns in late April

announced about

$495,000 in competitive

funds are available to

institutions of higher learning to conduct research on the national economic

impact of cooperatives.

“Cooperatives play an important role

in the growth of our rural economy,”

said Johanns. “This research will help

to measure the full impact cooperatives

are making in rural communities across

America and provide USDA with an

overview of what is working and how

cooperative businesses can play central

roles in vibrant rural economies.” 

The competitive funds will be used

to establish cooperative research agreements with institutions to examine the

impact of cooperatives, in cooperation

with USDA Rural Development. Each

agreement will include guidance on the

development of a methodology for collecting and assembling basic impact

data; applying the methodology to collect data and analyze the economic

impact of cooperatives and other appropriate studies to examine the socio-economic impact of cooperatives on local

communities. Projects must be completed by September 30, 2008.

Potential applicants are institutions

of higher education; public or private

colleges or universities, research foundations maintained by a college or university or private nonprofit organizations funded by a group of colleges or

universities. 

Application forms, guides and materials for the cooperative agreement can

be found at: http://www.rurdev.usda.gov/

rbs/coops/reic.htm or by contacting

USDA Rural Development at (202)

690-0368; TDD: (800) 877-8339.

Paper applications must be received in

the USDA Rural Development National Office, postmarked no later than

June 30, 2006; electronic applications

are to be received by the same deadline

date via: http://www.grants.gov. 

For more information, go to: http://

www.rurdev.usda.gov/ and click on

“Available Funds.” ■

Rural Cooperatives / May/June 2006 13

a forester with Smurfit-Stone Container Corp.’s Forest

Resources Division.

“This makes it a lot more accessible,” Seeley said of

All Woody’s new collection method.

Smurfit-Stone contracts for slash grinding and delivery

— with Johnson Brothers, among five or six other companies — and uses the woody material to generate power

and electricity for the mill, Seeley said. The company

burns 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 Fire

Solutions Inc., Rob Castellano of Horizon Tree Service,

Kit Sutherland of Bitterroot Resource Conservation &

Development and University of Montana assistant

forestry professor Beth Coulter — as well as Montana’s

wood products industry in general, are part of the solution to having a healthy forest, said Craig Rawlings,

smallwood enterprise agent for MCDC.

If not for their harvesting, transporting and processing

of very small diameter wood, all that material would be

burned 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 lifelong foresters have to rely on for their livelihoods.

“Although I’m a harvester of trees, I’m trying to

enhance the lives of the trees that we leave,” he said.

“What we’re trying to do here is treat the forest with love

and care.” ■

USDA funds co-op impact research 

A

Agriculture Under Secretary Thomas Dorr in April

announced nearly $4.2 million in grants to 18 small enterprises

to develop innovative uses for woody biomass in national

forests as sources of renewable energy and new products.

"This grant program helps to reduce the risk of wildfires by

removing built-up fuel hazards and improves forest health,"

said Dorr, in Missoula, Mont., to announce several Earth Day

initiatives by USDA. "In addition, these projects give an economic boost to our rural communities, increasing the nation's

sources of renewable energy." 

This year's recipients were selected based on a number of

factors, including those that make it economical to remove

woody biomass from forest lands and turning it into marketable products, while reducing the costs of recovery. In

addition, grants were awarded for projects targeted at removing economic and market barriers in using small-diameter

trees and woody biomass. 

All 18 grant recipients must match the federal portion by at

least 20 percent. Together with the non-federal matches,

approximately $13 million will be spent on this effort. For a list

of grant recipients and more information on the program, visit:

http://www.fpl.fs.fed.us/tmu/grant/biomass-grant.html. 

USDA awards $4.2 million

for wood biomass projects 
By Todd Thompson,

Country Manager

Land O’Lakes Inc. — Uganda

E-mail: tthompson@landolakes.co.ug

ost people know Land O’Lakes, Inc. as the producer of America’s top butter brand, one of the

country’s leading farmer-owned cooperatives and

a major player in agricultural supplies. But few

are aware that the dairy cooperative giant has an

International Development Division that has been helping farmers and rural businesses increase productivity in developing

countries around the world for 25 years. 

In the east African country of Uganda, Land O’Lakes has

been implementing a private sector-based dairy development

project since 1994. The project provides technical assistance at

all levels of the dairy value chain — from smallholder farmers to

milk-bulking cooperatives and collection centers to processors of

milk and value-added products like cheese and yogurt. Land

O’Lakes’ presence has helped Uganda’s dairy industry expand

and become more efficient, increased the popularity of dairy

products among consumers and raised income and profits for

smallholder dairy farmers and rural enterprises. 

Project staff based in Uganda and short-term consultants —

many of them U.S. farmers and agribusiness experts — offer

14 May/June 2006 / Rural Cooperatives

Bottling Hope in Africa

Land O’Lakes providing boost 

to Ugandan dairy industry 

M

Milk is delivered to market by Masaka farmers, who are

averaging an additional $349 per household as a result of

participating in a Land O’Lakes-directed project to improve

production 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 minerals his body gets from milk. 
advice on a wide variety of topics. These

include: cooperative development, marketing, milk bulking and handling,

value-added processing, production,

policy reform and industry organization.

Funding for the Uganda project and

other Land O’Lakes economic development initiatives overseas comes primarily from USDA and the U.S. Agency for

International Development.

Much of the Uganda project’s current funding came from the recent sale

of 11,100 metric tons of donated

American wheat on the local market

under USDA’s Food for Progress

Program. Under this monetization

process, USDA takes excess commodities raised by American farmers and

converts them to cash in developing

countries to provide grants to implement development projects. A study is

done before the sale to assure it will not

disrupt local production and markets.

Getting results 

Stimulating sustainable economic

growth to alleviate rural poverty is a

major goal of the Uganda project. The

country’s economy is largely agricultural, and two-thirds of the country’s poor

are smallholder farmers. To date, the

Uganda project has achieved results

that 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 milk

production in participating animals; 

• 45 percent increase in processingcapacity utiliztilization;

• 6.5 million-liter increase in domestic

consumption of processed dairy products; 

• 75,000-liter increase per day in milk

entering the cold chain;

• 89 percent increase in membership in

producer organizations.

A recent success story involves

MADDO Dairies Ltd., a company that

began operating a 1,200-liter microprocessing plant in the town of Masaka

in 2003. MADDO buys milk from local

farmer cooperatives and processes it

into flavored milk and yogurt. Like

many start-up enterprises, MADDO

had good ideas but lacked the knowledge, systems and internal controls

needed to effectively manage its operations.

With Land O’Lakes’ help,

MADDO’s management turned the

company around, instituting financial

and other reforms that brought it from

the brink of collapse to profitability by

2005. Within one year, the amount of

milk purchased from area farmers

increased 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 tower

developed by Land O’Lakes’ Sam

Sebadduka, supervisor of milk quality

and dairy processing in Uganda.

Sebadduka developed a water-cooling

tower that recycles water used in cooling the pasteurization unit. Adoption of

this simple technology cut water usage

from 90,000 liters a month to 40,000. It

also reduced the share of water as a cost

of production from 4.3 percent to 1

percent.

Uganda currently produces 1.2 billion liters of milk per year. Of that, 40

percent is consumed on the farm. Of

the rest, about 20 percent enters the

“formal” market in the form of

processed and value-added products

worth $108 million. The remainder

enters the “informal” market, where

small-volume traders buy milk and sell

it unprocessed to consumers, who then

boil it at home. The value of the informal market is about $160 million.

Central role for co-ops

Because rural cooperatives play a

central role in Uganda’s dairy industry,

much of the project’s emphasis is in the

area of cooperative development. Land

O’Lakes’ advisors help all types of

groups, from those still in the initial

planning stages to large established

businesses with turnovers approaching

$1 million a year. The project advises

on issues such as governance, membership responsibilities, the role of the

board and legal registration.

Because many smallholder farmers

have no experience running commercial

enterprises, Land O’Lakes also provides

assistance in business management.

Many groups, regardless of size, are

weak in accounting and financial management, leaving them unable to track

their funds and plan for the future. To

address this problem, Land O’Lakes is

introducing a common accounting software program to the cooperatives it

advises.

“This will help tremendously in getting the cooperatives we work with to

Rural Cooperatives / May/June 2006 15

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

continued on page 29
Type of Business:

Husker Ag LLC, Plainview, Neb., is

a majority producer-controlled ethanol

venture.

Business Objective:

The traditional operating procedure

of ethanol plants for processing dried

distillers grains (DDG) is to mechanically dry this byproduct (or co-product)

from a 70-percent moisture content

down to 10 percent, and then market it

as livestock feed. This drying process

consumes large amounts of natural gas.

Husker Ag will market its DDG coproduct as a “modified” product containing about 55 percent moisture,

thereby reducing the amount of natural

gas consumed and netting a substantial

annual decrease in energy costs. Air

emissions will also be reduced.

Annual Sales:

As a fuel-grade ethanol production

plant, Husker Ag LLC processes 8.5

million bushels of corn annually into

more than 20 million gallons of fuelgrade ethyl alcohol (ethanol). A secondary product produced is dried distillers grains, which are the corn components that remain after the starch is

converted to ethanol. 

Ethanol production is presently in

excess of 25 million gallons per year, an

output which exceeds the facility’s estimated projections. Co-product revenues

have contributed more than $6 million

year to date.

Number of

members &

employees: 

Husker Ag

has more than

500 members,

about 70 percent of whom

are agricultural producers. Employment

has increased from 30 to 32 employees,

thanks to the development of the new

co-product. 

How USDA Helped:

Husker Ag received a $226,850

Value-Added Producer Grant (VAPG)

from USDA Rural Development, which

was matched by Husker Ag. The money

is being used for working capital to further the development of the valueadded processes for area corn. 

Leader’s comment:

“The USDA Rural Development

grant will allow us to employ a co-products merchandiser and to supplement

the salaries of the plant maintenance

manager and plant lab manager to proceed with our distillers grain production,” says Seth Harder, general manager for Husker Ag. “This will benefit

area feedlots and member-producers.

Additionally, these funds will help to

purchase corn inventory for production

purposes. 

“Feedlots will benefit from the coproduct produced, as it is an excellent

source of protein and energy for livestock,” he continues. “The plant will

have the capacity to produce co-product

to feed 80,000 head of livestock.”

The Results: 

The ethanol plant has increased the

local demand for corn, resulting in a

higher local corn price. Farmers used to

be paid only a wholesale commodity

price for their corn which, in turn, was

shipped out of the immediate area.

Currently, Husker Ag pays an average of

5-to-10 cents per bushel over the prevailing corn market price. Since the plant is

located closer to the producers’ operations than other traditional markets, local

farmers haul their own corn vs. having it

trucked for them, saving on trucking

costs and increasing their income.

Major Challenge/

Opportunity Facing Co-op:

“The biggest challenge facing co-ops

today is finding a nitch to guarantee

profitability and market share in a rapidly growing industry,” says Harder. 

Contacts: 

Seth Harder, general manager;

Shaun Waldow, plant manager; 

Fred Knievel, board chairman. 

Husker Ag LLC

54048 Highway 20

Plainview, Neb. 86879

Phone: (402) 582-4446

E-mail: hapllc@huskerag.com ■

16 May/June 2006 / Rural Cooperatives

V ALUE-ADDED CORNER

Husker Ag LLC

Plainview, Neb.

Husker Ag used a Value-Added Producer Grant to help make its dried

distillers grains more marketable. DDG and other co-products have contributed an additional $6 million to the producer-owned business’ bottom

line 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-op

conversions; their thoughts may be used as

subject matter for forthcoming articles on 

this topic. E-mail her at: julie.hogeland@

wdc.usda.gov.

ince the early decades of

the 20th century, agricultural cooperatives have

been associated with particular values that have

influenced their marketing strategies.

The traditional strength of cooperatives

is that they help protect producers by

creating a reliable and fair buyer for

their products and enabling producers

to control their destiny by providing a

marketing channel that can extend from

raw commodity to finished product. 

Co-ops help establish orderly marketing channels and bring balance to

markets where producers would have

minimal bargaining power in highly

concentrated industries. Likewise, they

provide a reliable and fairly priced

source of production supplies. Co-ops

also help strengthen rural communities

by keeping more dollars close to home. 

What happens to these values when

cooperatives convert to a publicly traded corporation? Will producers suffer

from narrower marketing choices

and/or lower returns? If so, could this

create fertile ground for new cooperatives? Does the decreasing number of

producers and changing market conditions lessen the need for cooperatives,

or are they more vital than ever due to

increasing concentration in the food

processing and retailing industries? 

Professor Michael Cook of the

University of Missouri says, “The

recent wave of demutualizations raises

the question of whether the cooperative model can survive in an increasingly concentrated, deregulated, privatized and global business environment.” This article focuses on several

recent co-op conversions (also called

“demutualizations”) and some of the

issues they raise for their former members, as well as a proposed co-op conversion that was defeated. 

For Diamond Walnut Growers, the

touchstone for conversion was the cooperative brand and the desire to use it to

attract large amounts of outside capital

to “grow the brand” and penetrate new

markets. For Ocean Spray Cooperative,

owner of a major consumer beverage

brand, near-acquisition of its brand by

PepsiCo became an opportunity to reaffirm that the 76-year-old cooperative

was to be held in trust for future generations of growers as a sustainable, valueadded marketer of cranberries. 

Within this increasingly concentrated, deregulated, privatized and global

business environment, cooperatives

have sometimes sought to become “just

another business.” This can become a

self-fulfilling prophecy. Cooperative

values, and the extent to which producers hold them, may make the difference

between conversion, acquisition or

remaining under producer control.

Protecting farmers vs. 

building the brand

Traditionally, marketing cooperatives

are often seen as a “competitive yardstick,” providing competition to raise

the prices received by producers.

Formulated by economist Edwin

Nourse, this role emphasized farmers’

collective power or strength in the marketplace. Cooperatives were the “small

business Davids” that challenged the

“Goliath of big business.” Competition

provided through cooperatives kept

other firms in the marketplace fair or

honest. Even when cooperatives had

improved market conditions, Nourse

still felt farmer vigilance was required.

Cooperatives should maintain on standby, ready to spring into action to protect farmers as needed. 

At the core of traditional attitudes is a

belief that cooperatives are fundamentally different from investor-owned or publicly-traded firms, hence the need for

vigilance like that recently expressed by a

manager of a large processing cooperative. Any entity that is not farmer owned

and controlled is a competitor that

makes it difficult for farmers to compete,

he said. “If a corn grower’s crop fails, the

processing firm doesn’t care as long as

they can continue to get corn from

Rural Cooperatives / May/June 2006 17

Co-op Conversions

Extent of commitment to co-op values

key factor in decisions to convert 

S

Economist Edwin Nourse likened co-ops to

“small business Davids” that enable farmers

to do battle with industrial “Goliaths.” 

Photo of stained-glass window at First Presbyterian

Church, Van Wert, Ohio, by Terry Dietsch
somewhere to make cornflakes.” 

Contemporary economic or strategic

management discourse is, in contrast,

highly optimistic, such that farmer victimization would seem to be a thing of

the past. “For most global businesses,

the days of flat-out predatory competition are over,” say Morgan and Hunt

(1994:20). The new rules of market

competition call for networking, partnering and trust. In this setting, the

farmer protection provided by cooperatives and even cooperatives themselves

can seem like an anachronism. 

This market-oriented school of

thought tries to minimize the difference

between cooperatives and investor-owned

firms by examining how well cooperatives perform according to some of the

commonly used standards of investor

owned firms (IOFs). These include:

• Mission clarity — a singleness of purpose, such as a drive for profitability

that motivates investor-owned firms;

• Global sourcing — buying raw materials wherever they are cheapest in

order to lower manufacturing costs;

• Growth;

• Efficiency;

• Obtaining sufficient capital to survive

and grow in an industrialized food

system.

In contrast, the values encouraged by

the 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 the

need for grower protection, or even

collective marketing itself. To Mark

Hansen, an attorney with Lindquist and

Vennum and the architect of several

cooperative conversions, the CapperVolstead Act — which provides limited

anti-trust exemption to farmer cooperatives engaged in marketing their products — reflects an era that no longer

exists. For that reason, he questions the

need for the Act itself. 

“Why do farmers need CapperVolstead?,” Hansen asks. “When do

they need to collectively price a product

compared with selling it individually to

Cargill?” In 1921, farmers were not

looking for processing facilities, just

product marketing. In that period, the

supply of farmers was essentially “endless” compared with today’s very low

farm population. And some of them are

seeking an exit strategy from farming.

Capper-Volstead did not address capitalizing a significant branded product

into the marketplace, says Hansen. 

How technological aspects of marketing and procurement will affect traditional cooperative issues of equity,

equality of opportunity, disproportionate market power or market access is

not clear. Agricultural industrialization

brought new values, such as “size and

scale” and “being a low-cost producer,”

to agricultural cooperatives. Consumerbranded products offered growth

opportunities that did not exist for the

minimally-processed products traditionally handled by cooperatives. 

Now, cooperative managers ask,

“How can I take the value of the brand,

unlock it and make it liquid?” Others

ask, “How can I get additional low-cost

supply to increase product demand?”

As cooperatives became “market-driven” and “value-added” businesses, some

industry observers suggest a focus on

profit has begun to diminish the other

values provided by cooperatives. In documents filed with the Securities

Exchange Commission (SEC), cooperatives pursuing conversion routinely

state their commitment to market-oriented values such as growth, improving

profitability and efficiency, and enhancing the return on the product brand. 

The July 2005 conversion of

Diamond Walnut Growers into

Diamond Foods, a publicly traded firm,

offers a commentary on changing cooperative values in some sectors. In 1912,

the California Walnut Marketing

Association, the precursor of Diamond

Walnut Growers, initiated orderly marketing in the walnut industry through a

federation of local walnut packing

cooperatives. As the federated structure

evolved into a centralized cooperative,

Diamond Walnut’s strong marketing

orientation emerged. 

The cooperative became a leading

domestic marketer and distributor of

culinary nuts. In the late 1990s,

Diamond Walnut focused on becoming

a more competitive supplier to U.S.

grocery chains and, in 2004, launched

its Emerald brand of snack nuts. These

objectives conflicted with the traditional

cooperative values of “enhancing the

raw-product price” and providing a

home for growers’ product.

As a cooperative, Diamond Walnut’s

pricing philosophy was, “A rising sea

floats all boats.” Since 1965, Diamond

Walnut’s average annual premium above

the market has been 1.56 cents per

pound (source, Diamond Foods). The

Walnut Purchase Agreement accompanying conversion requires growers to

deliver their entire crop to Diamond

Foods for the duration of the contract:

three, five or ten years. The contract

offers no price protection or guarantees

to pay market prices. Indeed, Diamond

Foods has cautioned growers that payments could be reduced compared with

the prior marketing agreement. 

Producers more vulnerable?

University of California Economist

Shermain Hardesty suggests these sin18 May/June 2006 / Rural Cooperatives

“A co-op has a different job than a publicly

traded corporation,

which lowers the prices

paid for inputs.”

—Chris Phillips
gle-buyer (monopsonistic) conditions

could make the contracting growers

vulnerable to price manipulation. 

“A lot of growers had in their minds

that they would still be protected even

through the conversion,” commented

one former member. “But the company

will have to decrease expenses.

Management will procure the cheapest

product rather than maximize the price

to a grower, as a co-op does. A cooperative would keep the industry from taking advantage of growers.” 

At the time Capper-Volstead

was enacted, the market power

of each one of the “endless supply of farmers” was so limited

that economics textbooks

described the farmers as “atomistic” compared with the size of

the businesses they were up

against. Imbalance and disparity

continue to describe agricultural

markets. Consolidation of agricultural markets in recent

decades means many farmers

have only one buyer. 

National Cooperative

Business Association (NCBA)

CEO Paul Hazen says the belief

that predatory marketing no longer

exists is shortsighted. “Cooperatives

have made farmers into price setters,

not price takers. By selling these businesses, we’ve lost this tool.” Hazen

adds that if farmers’ only option is to

sell to one huge agribusiness, “they are

at the mercy” of that agribusiness.

The durability of the cooperative

model — which has lasted for more

than 150 years — is being threatened

from the inside, many believe. An

NCBA study found that most conversions are triggered by management. A

small group of people motivated to

change the business may present members with an ultimatum and only a very

short period of time to vote. The

absence of share ownership to compensate and motivate management can be

an incentive within cooperatives, in particular for incumbent management to

encourage conversion. 

With conversion, select members,

directors or management can cash-out

at one moment in time the long-term

value of a cooperative, painstakingly

built up through the ups and downs of

commodity cycles by (in many cases)

several generations of producers. Total

stock benefits received by a four-member management team at Diamond

Foods could top $16 million, according

to NCBA. To avoid short-circuiting

members, Hazen recommends an open

and transparent process, requiring high

thresholds of member approval to

approve conversion. 

When brand becomes paramount

Another inside threat occurs when

many cooperatives’ chief asset, the

product brand, comes to drive the

cooperative more than the needs of

members for whom it was founded. In

the mid-20th century, the Californiabased avocado cooperative Calavo

mainly identified with and promoted

Haas avocados (Stanford and

Hogeland). This restricted its ability to

grow by attracting members with other

varieties. Calavo resolved this by

aggressively promoting members’ fruit

and establishing its own brand. 

Getting full benefit of brand development required more and cheaper

avocados than California members

could supply, so the cooperative turned

to non-member supply from Mexico,

Chile and New Zealand. Calavo converted in 2001. Outside investment —

e.g., product, equity or foreign-direct

investment — may be needed to derive

maximum benefit from the market

development behind a cooperative’s

brand name. 

Cooperatives exist to provide a

secure market for their members. A coop manager facing heightened import

competition brought by trade liberalization said this value represented a “huge

incentive” for his processing cooperative not to convert. Perpetually on the

lookout for cost advantage, any cooperative which converts could disenfranchise a portion of its former growermembers in rural areas where alternative income opportunities may be

scarce. 

Although the United States is

the leading exporter of walnuts,

Hardesty suggests that to fulfill its

mission to maximize long-term

shareholder value, Diamond Foods

may import walnuts from China,

the world’s largest producer.

California-grown walnuts could

then experience reduced demand

and depressed prices as a result. 

Trade liberalization allows vendors to source globally, to compare

prices from many suppliers. This is

a “low-cost supplier” model of

competition. The economic norm of

efficiency renders such competition

impartial, even if the impact on raw

product suppliers of such instability is

in effect not much different from

predatory (destructive) competition. 

Welch’s, the grape products cooperative owned by National Grape

Cooperative, is committed to using the

domestic grapes of National Grape

members as its “first supplier.” It buys

all of the co-op members’ grapes — a

reflection of the traditional cooperative

value of finding a home for what is produced by members. This holds true

whether grower-owners provide as few

as five tons per acre or as much as nine

tons per acre, as long as quality standards are met. 

Supply variation has spurred cooperative growth. Welch’s, like many coops, markets globally. Through market

segmentation, global sourcing may supplement domestic production to provide cost and profit advantages that

Rural Cooperatives / May/June 2006 19

Caravaggio’s painting shows David with the head of

Goliath, a story frequently used to symbolize the 

struggle of small co-ops with much larger competitors.
define sustainable competitive advantage. But Welch’s commitment to

receive all of the quality grapes produced by its grower-owners is the kind

of approach that clearly protects

domestic farmers. 

Cooperatives ask more of themselves

than competing business models and

can risk over-extending themselves on

behalf of their producers. Almost 20

years ago, economist V. James Rhodes

declared, “one of the unique obligations

of cooperatives is a commitment to the

continuation of past and present member service that goes beyond that of the

IOF” (1987:166). The consequences of

how this line is drawn may have greater

ramifications now than it did in the

past. When cooperatives pay higher

than the market price, they can tell

farmers, “We took care of you; you got

the money first, so the co-op didn’t

make any money.” Farmers may like

this, especially if they are not necessarily concerned about the future of the

organization. 

Before it can take care of farmers,

the cooperative has to be a sound business. Overpaying market prices to

members can lead to “capital starvation” within cooperatives. Members

need a competitive return on both

product marketed and investment.

Making investment proportional to

patronage is one way to achieve this

objective. 

Using relationships to build a brand

By seeing other firms as adversaries,

the Nourse model of cooperation tended to segregate cooperatives from the

rest of the business community. The

expression “cooperatives as the Fourth

Estate” captured this distinction.

Exploiting the concept of the “cooperative difference,” cooperatives established their own version of the marketing or supply channels used by private

industry. 

Cooperatives tried to “do it all” by

providing an integrated food system

that took the raw product from “farm

gate to plate.” Likewise, Ocean Spray

tried to “do it all” by going from “bog

to bottle,” managing and controlling

every aspect of the supply chain. 

In June 2004, Ocean Spray members

rejected an offer from PepsiCo that

would have given the corporation control of the Ocean Spray brand and juice

business. The Nourse “mythology” —

which prized cooperatives as “small

Davids among Goliaths” — held no

sway for those cranberry producers who

favored the PepsiCo joint venture.

They argued that Ocean Spray could

not survive on its own in a world of

giants. Too small to go it alone, the

cooperative needed a partner, they felt. 

The debate over the joint venture

was a healthy experience for Ocean

Spray. A much deeper dynamic than

dollars was involved: at stake was the

growers’ right to control their destiny

and maintain a multi-generational way

of life. Reflecting on the pre- and postdebate period, Ocean Spray spokesman

Chris Phillips said, “You can have it

both ways—maintain cooperative status

and have a major worldwide brand. A

lot of people have looked at cooperatives as outdated, but it’s a very bold

business model. Cooperatives have to

be different in how they partner with

others, in distribution, in manufacturing, in how they go to market. A cooperative needs to maintain majority control over its brand so at the end of the

day it’s still a cooperative. 

“But staying a cooperative doesn’t

mean going it alone. By partnering

with others, you can still go global and

set grower returns on a healthy growth

curve. Our returns have more than

tripled in the last four years. A cooperative has a different job than a publicly

traded corporation, which lowers the

price paid for inputs. Ocean Spray’s job

is to deliver to members a competitive

commodity price and a dividend for

owning a major brand.” For approved,

contracted acreage, Ocean Spray takes

all the fruit grower-members produce.

Less ownership, more control

Within Nourse’s “yardstick” philosophy, farmer control was expressed — or

objectified — through investments in

tangible assets such as processing

plants, grain elevators or marketing

facilities. The mark of ownership was

often exclusivity, for example, the ability

to “drop in” on the manager at will or

to conduct site tours that now may be

precluded by health and safety restrictions (for example, among artificial

insemination or pork cooperatives).

Exclusivity influenced the operating

philosophy established for CF

Industries, a fertilizer cooperative. It

was started in 1946 as a fertilizer brokerage operation by a group of regional

cooperatives seeking to pool their purchasing power. CF grew to be one of

North America’s largest manufacturers

and distributors of nitrogen and phosphate fertilizer products. It was owned

by eight farmer cooperatives: CHS Inc.,

MFA Inc., Growmark Inc., Southern

States Cooperative, Land O’Lakes,

Tennessee Farmers Cooperative,

Intermountain Farmers Association and

Cooperative Federee de Quebec. 

Through the end of 2002, CF operated as a traditional supply cooperative,

focused on providing its cooperative

owners an assured supply of fertilizer.

SEC documents note that more than 80

percent of CF’s annual sales volume was

to its cooperative owners. CF diversified into fertilizer manufacturing and

expanded its distribution network, starting in the 1960s, by acquiring several

20 May/June 2006 / Rural Cooperatives

continued on page 30

Protecting the

market share of

producer-members

starts with the

selection of a CEO

who is willing to

make this commitment.
Rural Cooperatives / May/June 2006 21

By Donald A. Frederick

Program Leader for Law,

Policy & Governance;

USDA Rural Development

donald.frederick@wdc.usda.gov

tate and local governments that see opportunities to hold down costs by

procuring goods and services through a cooperative

should gain assurance from a recent

Internal Revenue Service (IRS) administrative determination. While no

Subchapter T tax issues are involved,

the decision highlights another Internal

Revenue Code (Code) section helpful to

public institutions which organize a

separate entity to engage in joint purchasing activities.

Code Sec. 115 provides that gross

income for federal income tax purposes

does not include income accruing to a

state or territory, or any political subdivision thereof, which is derived from a

“...public utility or the exercise of any

essential governmental function.” This

provision gives state and local governments the flexibility to create separate

entities to perform essential services

without incurring federal income tax

liability on earnings that are (1) generated by those entities and (2) retained

within the public sector.

In Private Letter Ruling 200610001

(released March 10, 2006), the IRS

determined that income earned by a

nonprofit corporation, formed by public

school districts for the purpose of cooperatively purchasing supplies, is not taxable income under Code section 115.

Case facts

Two school districts formed a nonprofit corporation for the sole purpose of

purchasing goods and services for public

school districts and other members. The

ruling points out that “Through cooperative purchasing power, Taxpayer enables

its members to purchase a range of

goods and services at reduced prices.”

The ruling doesn’t discuss who

became members of the association, its

governance structure or its previous tax

history. But as the basis for submitting its

request for a ruling that it is entitled to

tax-free status, the purchasing association

amended its articles of incorporation to

provide that its members must be public

school districts or other government

entities that meet the requirements of

Code Sec. 115. In its request, the entity

identified current members that did not

meet this test and promised to terminate

those memberships by a specified date.

The article amendments also provide

that the entity may not issue shares of

stock nor declare or pay dividends. Also,

while reasonable compensation can be

paid to individuals for services rendered,

no part of net earnings may inure to the

benefit of any director, officer or other

individual. In the event of dissolution,

any remaining assets after liabilities are

paid will go only to member governmental units on the basis of the prior three

years’ patronage.

IRS decision

In granting favorable tax treatment,

IRS held that the entity meets both

requirements to qualify for Sec. 115 tax

status. First, IRS notes that its only

function is to procure goods and services at more competitive prices for its

members. IRS found this to meet the

test of performing an essential governmental function within the meaning of

Code Sec. 115(1).

Second, IRS notes Code Sec. 115

also requires that any income must

accrue to a state or political subdivision

thereof. IRS finds that “...income

accrues to its members through the procurement of goods and services for its

members.” It also points out that upon

dissolution, assets remaining after liabilities are satisfied can be distributed only

to qualified members on a pro rata basis

and earnings cannot be distributed to

private persons. Under these conditions,

the entity’s income also meets the test of

accruing only to states and political subdivisions thereof.

IRS concludes that so long as the

entity operates as represented and cleans

up its membership rolls by the date

promised, it will be eligible for Code

Sec. 115 tax treatment on that date. ■

Government purchasing 

co-ops operate tax free

S

LEGAL CORNER

IRS held that the

entity meets both

requirements to

qualify for Sec.

115 tax status.
By Sheri Aldape,

USDA Farm Service Agency

orth Dakota farmers help

feed the nation and the

world with the crops and

livestock they produce.

Now, under the umbrella

of the North Dakota Farmers Union

(NDFU), they are taking it another step

forward: they are going to cook up the

food and dish it out at their own restaurant in Washington, D.C. The new

establishment, called Agraria, is slated

to open this summer in Georgetown, a

primary nightlife and upscale shopping

area.

Agraria was originally going to open

in Baltimore’s Inner Harbor, but that

plan was eventually shelved in favor of

the Washington locale. If successful, it

is hoped that this will be the first of a

number of such farmer-owned restaurants around the nation. 

The project was first conceived in

2002 as part of the work on an NDFU

project called the Ultimate ValueAdded Cooperative. Planners saw benefits for NDFU members in owning a

restaurant that could gain a marketing

edge by promoting the fact that its

meals are derived from family farmers.

The restaurant will also provide an

opportunity to educate consumers

about how their food is grown.

The restaurant is wholly owned by

Agraria LLC, a North Dakota-based

limited liability company. NDFU,

organized as a farmer-owned cooperative, currently owns about 60 percent of

Agraria, but that share will be reduced

as more family farmers purchase shares

and become direct owners, as many

have already done.

The company has a

seven-member board of

governors, of which

NDFU President Robert Carlson is

serving as interim president. Carlson, a

grain and oilseed farmer near

Glenburn, N.D., was also an organizing

member of the Dakota Growers Pasta

Co., in which he remains an active

member. He is also a former member of

the USDA-Agricultural Trade Advisory

Committee for Grains & Oilseeds, and

recently traveled to China and Japan to

develop niche markets for North

Dakota commodities.

Direct marketing

Farmers are eager to capture more

profits from direct marketing, says Tom

Prescott, the project manager and president of the Magnate Group LLC, the

development firm for Agraria. Running

parallel to that is the desire of many

restaurants to source more of their food

directly from the farmers who grow or

raise it. “So this takes it to the next level

— allowing farmers to participate in the

ownership structure of the business.”

Information on various farmers and the

foods they provide will be available at

the restaurant. 

“Farmers are important, not just in

the overall industry that provides the

food on our tables, but also as a vital

fabric of the American way of life,”

Prescott says. “So it’s very important for

this business to serve an educational

purpose by promoting farmers, in terms

of their work and daily life, and the

security they bring to the food system.” 

Having the first restaurant open in

Washington is a great opportunity to

showcase the family farmer to important decision makers in the nation’s capital since “every state in the union

is represented by their congressional members here,” Prescott

notes. Washington is also a hub

for business and industry leaders

from around the globe.

The District was also attractive

because it is a major tourist destination and is home to a relatively

transient population that dines

out more frequently than average.

The D.C.-area population also

has higher-than- average disposable income. All of this adds up to

making it one of the nation’s

fastest growing restaurant markets. 

If Agraria restaurants open in

other cities, Prescott says the

cooperative, farmer-owned character of

the business will stay intact. 

Room with a view 

The 14,000-square-foot restaurant,

located in the Washington Harbor

complex in lower Georgetown, will

have a beautiful view overlooking the

Potomac River. The décor, being

designed by the award-winning

Adamstein & Demetriou architecture

22 May/June 2006 / Rural Cooperatives

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 of

the family farmers who own and supply it. The restaurant

will seat 355 people, but that number can change depending on table configuration and private events.

The cuisine will be contemporary American, with some

Italian and French influences. Since the food will be

sourced from farmers from across the country, the menu

will have the ability to change daily to ensure that the

freshest products are used. 

From 30 to 60 percent of the food initially served at

Agraria will be sourced from family farms. In time,

Prescott says the percent of food sourced directly from

family farms will increase. He also hopes to secure food

from co-ops in the Washington, D.C., area. 

“The seasonal aspect is always an issue you have to contend with here. When the weather warms, right at the time

that we are opening, it will be a prime opportunity for us

to source from local farmers. We also encourage farmers to

contact us regarding products that they are offering so we

can discuss sourcing from them,” Prescott says.

The restaurant will also look to source seafood from

the Chesapeake Bay to attain the highest quality products

possible. 

Chef linking 

with farmers 

When trying to pick a

name of the restaurant,

“Agraria” was the natural fit. It is Latin for

“one of the fields, or

lands,” which was felt

to be applicable to

farmers’ way of life and

to best reflect the

restaurant’s slogan:

“From our fields to

your tables.” 

Paul Morello, the

head chef, was recommended for the job

based in part on his

background of working

with farmers and

obtaining products from farmers markets. Morello, who

has been featured in several publications for his cuisine,

was previously an executive chef at Les Halles, a French

restaurant in D.C. 

Morello has been talking to Pennsylvanian farmers who

will supply food for some “exotic” dishes, and has met with

North Dakota farmers who will supply flour for his homemade gnocchi and lasagna. Morella is also using American

cheese from Wisconsin and Idaho, and he plans on using

North 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 not

only for his culinary art, but because of his experience

procuring food from farmers markets and co-ops. Dishes

seen above are his Mozzarella and Tomato Salad and Tuna

au Poivre. Photos courtesy Agraria/North Dakota Farmers Union 

Rural Cooperatives / May/June 2006 23
24 May/June 2006 / Rural Cooperatives

he Agri-Mark dairy cooperative, Methuen, Mass.,

and the Allied Federation

of Cooperatives — a federation of 26 small co-ops

in New York — have voted to join

forces. 

About half of Allied’s 800 members

are expected to join Agri-Mark over the

next several months. Three Allied

members have been named to AgriMark’s 17-member board, and a fourth

may be appointed. Rather than calling it

a merger, the two co-ops say they are

“joining forces” as one cooperative,

under the Agri-Mark name, to wield

greater marketing and political muscle. 

“The farmers of both the Allied

Federated Cooperatives and Agri-Mark

have voted to come together to protect

the region’s dairy industry and work for

higher farm milk prices,” the two coops said in a joint statement. “As dairy

farmers, we need to work together to

preserve what we have left of our

regional industry,” says Mike Barnes, a

dairy farmer from Mount Upton, N.Y.,

who serves as Allied’s board chairman.

“This joining of our organizations

makes us a stronger cooperative than

ever before,” says Carl Peterson, a

Delanson, N.Y., dairy farmer who

serves as Agri-Mark’s chairman. “From

northern Maine to Vermont, and from

Southern Connecticut to Western New

York, we are going to continue to be

the voice of the Northeast dairy farmers

and represent them in the marketplace

as well as in state legislatures and

Washington, D.C.

“While other companies are closing

dairy plants in the region and investing

in mega-plants in California and New

Mexico, Allied/AgriMark has more than $75

million invested in four

dairy processing plants

in New York, Vermont

and Massachusetts to

provide a milk market,

maintain stable prices

and generate valueadded products under

the award-winning

Cabot and McCadam

brands of cheddar

cheese, butter and other

dairy products,”

Peterson noted. 

“We’re making a real

financial commitment to

the Northeast,” he continued. “Our goal is

better dairy markets and better longterm farm milk prices. Farm prices have

been up and down the past several years

and when you couple that with plants

closing, you can see why farmers have

to work together like never before.” 

The small co-ops that operated

under the Allied umbrella are dissolving, with most members choosing to

join Agri-Mark, although there is no

obligation to do so, says Bob Wellington, Agri-Mark’s senior vice president.

Most of the new member-farms are in

the northern tier of New York, stretching from Syracuse to Plattsburgh. 

By late April, more than 300 former

Allied members had already joined

Agri-Mark directly, including 95 percent of those in the Northern Tier

close to its Chateaugay facility. Another

50 to 100 more in the central part of

the state are expected to join in the next

several months as their cooperatives

dissolve, according to Agri-Mark

spokesman Douglas DiMento. 

Though the Allied Federated

Cooperatives will cease to exist, Barnes

will continue to serve as chairman until

the transition is completed over the

next several months. Agri-Mark had

roughly 1,250 farmer-members

throughout New England and New

York, with more than 500 of its farmers

in the Empire State. As of May 1, the

cooperative had 1,530 member farms,

with more than 775 in New York.

Agri-Mark bought the McCadam

Cheese processing plant in Chateaugay,

N.Y., in 2003 when its foreign owner

announced plans to close the facility.

The 150 members of the former

Chateaugay Cooperative also joined

Agri-Mark at that time. Agri-Mark has

since been marketing additional New

York milk and investing in the McCadam

brand on behalf of its dairy farmerowners. ■

Agri-Mark, Allied Federation

dairy co-ops join forces

T

Adding salt to McCadam’s New York Cheddar cheese boosts

flavor and helps control the aging process. Agri-Mark

bought the plant in 2003 when its foreign owners announced

plans to close it. Photo by Doug DiMento, courtesy Agri-Mark 
Aurora Co-op pursuing new

ethanol, ag-bio multiplex projects 

The Aurora Cooperative, Aurora,

Neb., and Aventine Renewable Energy

Holdings Inc. have signed a letter of

intent to develop a new ethanol plant

one mile west of Aurora. In its first

phase, the plant will produce

100 million gallons per year,

but plans call for later

expansion to 220 million

gallons annually. The

ethanol plant is to be constructed on a 135-acre site,

called Aurora West, adjacent

to the Nebraska Energy

LLC ethanol plant, of which

Aventine is the majority

partner/owner. The plant

will be owned by Aventine,

while Aurora Cooperative will be the

exclusive grain supplier to the new facility, as well as the exclusive marketer of

syrup and wet distiller’s grain with solubles (WDGS). A starting date is still to

be determined.

In addition to the ethanol plant, the

project will include what co-op

President and CEO George Hohwieler

calls “the first ag-bio multiplex in

North America.” The site will include a

state-of-the-art grain-handling facility, a

fertilizer complex and a double-loop

railroad system to accommodate grain,

fertilizer, ethanol and DDG shipments

accessing the Burlington NorthernSanta Fe (BNSF) mainline railroad.

The multi-million bushel grain facility

will receive and deliver area producers’

grain to end users in the ethanol, feed

and food industries. The fertilizer complex will have the ability to expand,

based on the continued market growth

Aurora Cooperative is experiencing.

Aurora West will also be home to a

75,000-square-foot warehouse leased by

Syngenta Seeds Inc. which will occupy

six acres and have capacity for 500,000

units of seed corn. “The Aurora West

project, with its contemporary, multidimensional uses, has the possibility of

becoming the cornerstone for a visionary, ag-bio research and development

campus that Congressman Tom

Osborne has supported for years,”

Hohwieler added. Total value of the

multiplex could exceed $250 million. 

Wisconsin governor vetoes

new state cooperative law

Wisconsin Governor Jim Doyle

vetoed Assembly Bill 327, which would

have created a new form of corporate

organization, the unincorporated cooperative association. “I agree with the

intent of the legislation — to help

cooperatives raise needed capital

through non-patron investment partners,” Doyle said. “However, the bill

creates a tax consequence that was

unintended by the authors and supporters of the bill. Although unintentional, 

I cannot sign a bill with consequences

such as these.” Doyle said he will be

working with the state legislature and

supporters of the bill to pass a version

in the current session that achieves the

goals of the proposal, without the creation of this tax consequence. 

The Wisconsin Federation of

Cooperatives (WFC) says it is disappointed by the governor’s veto, which it

said would create a second Wisconsin

cooperative law modeled after laws

recently enacted in Minnesota

and Iowa, among other states.

The bill was intended to provide an opportunity for new

business development in

Wisconsin. “While we do not

agree with the position taken

by the Department of Revenue,

WFC appreciates Governor

Doyle’s commitment to pass a

new version of the bill in the

remaining days of the 2006

Legislative Session,” WFC said

in a statement issued by President Bill

Oemichen and Chairman Ed Brooks, of

Foremost Farms USA. 

The Wisconsin Farmers Union has

been leading the opposition to the bill.

WFU President Sue Beitlich, a dairy

farmer in Vernon County, says the bill

“would allow cooperatives to form with

as little as one patron and as much as 70

percent financing from corporate

investors...The proposed change in coop law cuts the heart out of the member-controlled cooperative,” she wrote

in an editorial posted on the WFU

website, adding that it “contains no

protection for existing cooperatives and

could open the door for foreign

investors to sink cash into patronowned cooperatives.” 

CWT fee raised to 10 cents

to counter surging milk supply 

To generate more funds to address a

surge in U.S. milk production that is

beginning to depress farm-level prices,

Rural Cooperatives / May/June 2006 25

NEWSLINE

Send items to: dan.campbell@wdc.USDA.gov

A computer-generated conceptual rendering of what the new

ethanol plant and ag-bio multiplex near Aurora, Neb., may look like.
members of Cooperatives Working

Together (CWT) have voted to double

the program’s five-cent per hundredweight assessment. The higher assessment will begin on July 1, 2006, and

run through 2007. 

“We’ve demonstrated in the past

three years that CWT can help dairy

farmers address a supply-and-demand

imbalance, but we need more leverage

as we look ahead into 2006 and 2007,”

said Jerry Kozak, president and CEO of

the National Milk Producers

Federation (NMPF), which manages

CWT. Milk production was up 3.5 percent last year and continues to grow

rapidly in 2006. Kozak said that the

farmer-funded self-help program

“risks being irrelevant in the marketplace if we don’t have sufficient

resources to do what farmers expect

of us.” 

CWT’s current budget does not

contain sufficient revenue to fund

additional herd retirement rounds,

Kozak said. The higher assessment, to

be collected starting in July, will bring

in the additional money needed over 18

months to continue both the herd

retirement program and the ongoing

export assistance program. Even with

the higher assessment, Kozak expects

the level of overall participation in

CWT will remain at 74 percent of the

nation’s milk supply.

“Every one of CWT’s 49 member

cooperatives, along with the hundreds

of individual farmers paying into the

program, recognizes that the stakes

have gotten higher as the extent of the

supply/demand imbalance has grown,”

he said. 

In addition to voting for a higher

assessment, CWT’s members also modified several other of the program’s features, including: 

• The regional safeguard levels in the

Northeast, Southeast and Midwest

were raised to 0.75 percent of each

region’s annual milk production, up

from 0.5 percent. 

• Whole milk powder (WMP) was

added to the list of dairy products eligible for export using CWT bonuses.

Additionally, Mexico, a major market

for WMP, was added to the list of eligible destinations for that specific

product. 

• The target price for cheese under the

export assistance program was moved

from $1.40 per pound, to $1.30. The

target butter price remains at $1.30

per pound.

Sun-Maid girl turns 90

with digital TV ads 

The Sun-Maid Girl, famous for her

red bonnet and for holding a tray of

freshly picked grapes, is receiving a digital make-over on her 90th anniversary.

This American icon is taking on an animated form in nationwide television

commercials, print advertising and on a newly

designed website:

www.sunmaid.com. It was

90 years ago that a young

girl named Lorraine Collett posed for

the raisin and dried fruit co-op’s trademark in Fresno, Calif. Her likeness

would become one of the world’s best

known trademarks and the cornerstone

of Sun-Maid’s packaging and advertising. 

“Set to turn 90, the Sun-Maid Girl

deserves a new look for the new century

and our continued mission of sharing

the benefits of naturally delicious raisins

and other dried fruits with consumers,”

says Barry Kriebel, president of SunMaid, in Kingsburg, Calif. “We’re

excited with the resulting television

commercials, which put a modern spin

on our message that raisins are “just

grapes and sunshine.” 

The animated Sun-Maid Girl and

the new television commercials are the

work of Synthespian Studios, North

Adams, Mass. Founded in 1912, SunMaid Growers is the world’s largest

producer and processor of raisins and

other premium quality dried fruits.

Sun-Maid’s raisin sales of over $200

million and 200 million pounds annually are approximately half “Sun-Maid”

retail consumer products and half

ingredient products for such items as

cereals, breads, and a variety of other

food products. 

USDA announces $43.7 million

in rural broadband system loans 

USDA Rural Development has

issued three loans totaling $43.7 million

to provide broadband service to an estimated 41,000 rural households and

businesses in four states. “Broadband

service provides an economic engine for

rural communities, which opens the

door for business development,

improved health care and additional

educational opportunities,” said

Thomas Dorr, agriculture under secretary for Rural Development. “The

infrastructure built with these funds is

an investment in the future of these

rural communities.”

The loans were made to Broadband

South, which will serve 64 communities

in southeastern Georgia and Florida; to

Jaguar Communications Inc., to serve

eight counties in Minnesota; and to

Mid-Hudson Cablevision in New York

State to bring improved and advanced

service to seven rural communities.

The Rural Development Broadband

Access loan program authorizes USDA

Rural Development to make loans to

deploy broadband service to communities with a population of 20,000 or less,

with first priority going to communities

without broadband service. The loans

are low interest and allow for the technology to be market driven.

The Rural Development Broadband

Access Program has made 56 loans for

more than $868 million since the program was created in 2002.

26 May/June 2006 / Rural Cooperatives

The Sun-Maid girl (above) has gone digital

in the co-op’s new TV commercials.
DFA re-opens Michigan

dairy processing plant

Dairy Farmers of America Inc.

(DFA) has re-opened a dairy processing

plant in Adrian, Mich., previously

owned by Diehl Inc. City officials and

DFA employees celebrated the plant’s

opening March 13 during a special ribbon-cutting ceremony. The plant,

which has been idle since October

2005, received its first delivery of milk

on March 14. The plant will create 25

new jobs. 

“Adrian is a great processing location

because it is located in an area where

milk production is increasing,” says

Glenn Wallace, chief operating officer

of DFA’s Mideast area. “DFA member

milk production in Michigan has grown

9 percent a year for the past two years,

and we expect that trend to continue.”

DFA plans to process more than 16.5

million pounds of milk into condensed

milk, cream and non-fat dry milk powder each month at the plant. A processing capacity of over 60,000 gallons per

day will help to balance the growing supply of milk being produced by DFA

dairy farms in Michigan.

The plant will allow DFA to process

the excess milk that is produced during

the spring and summer months.

Previously, the milk had to be hauled

out of Michigan to customers as far

away as Kentucky or Wisconsin.

Wallace says that the cooperative and

its members should realize significant

savings in transportation costs.

Kansas co-op director on Today Show 

Larry Hoobler, a board member for

Farmers Union Cooperative Business

Association in St. Mary’s, Kan., and his

wife Diane, were featured on NBC’s

Today Show on April 27. They participated in a “City-Country Life-Swap”

segment, which contrasted life in the

Big Apple (Manhattan, N.Y.) with the

Little Apple (Manhattan, Kan.) 

Trying out country life was Sarah

DiMuro, a New York City-born and

raised woman in her twenties, who had

never spent time out of the city. While

on the farm, she milked a cow, sheered

sheep, rode in the tractor and planted

sweet corn. Meanwhile, the Hooblers

navigated the subway system and went

to a New York City nightclub. They

also took over some of their counterpart’s work duties as a

personal assistant. 

How did they get so

lucky? The Kansas

Cooperative Council

reports that four years

ago the Hooblers were

included in an MSNBC

show on the 9/11 terrorism attacks on America,

and how they affected

agriculture. The producer, who spent time at

their farm to prepare for

the show, is now a producer for the Today

Show. When this story

came up as an idea, he said he knew just

who he wanted to cast!

California’s Central Valley

losing best farmland fastest 

Most counties and major cities in

California’s Central Valley are failing to

make significant progress at preserving

farmland in one of the nation’s most

important agricultural regions, according to a new American Farmland Trust

(AFT) study. Many of the high-value

fruit, nut and vegetable crops grown

here cannot be grown anywhere else in

the United States. “Though local land

use plans are well-intentioned,” said

Edward Thompson, Jr., AFT’s

California director, “the best farmland

is being paved over the fastest, and the

land is being developed very inefficiently in terms of the amount of land used

for each new resident. It’s a waste of a

precious resource.”

The AFT study, covering 11 counties from Sutter to Kern, found that

during the 1990s, 53 percent of the

97,000 acres that were urbanized was

high-quality farmland, and that for

every eight new residents, an entire

acre of land was developed. Urban

development in the Bay Area is about

twice as efficient, and in Southern

California it is almost three times as

efficient. AFT also found that

“ranchettes,” rural residences on large

lots, are a particular threat to agriculture. This fragmentation poses a serious risk to agriculture, not only

because of the potential for conflict

with intensive farming operations, but

also because it helps to drive the price

of farmland above what farmers can

afford, the AFT report notes. 

Current building trends will lead to

the loss of another 900,000 acres of

farmland, more than doubling today’s

developed area. By 2040, the loss of

agricultural output due to land conversion could top $860 million per

year. Though there is still an opportunity to save a significant amount of

farmland, AFT warns that, unless

counties and cities encourage more

efficient development, the Central

Valley will reach a “tipping point”

Rural Cooperatives / May/June 2006 27

DFA workers celebrate the re-opening of a milk plant in

Adrian, Mich. Previous owners idled the plant last October.

Green Acres in reverse: Manhattan, Kan.,

farmers Larry and Diane Hoobler got a

taste of life in the other Manhattan on

NBC’s The Today Show.
beyond which it will become too difficult to reach that goal. “The political

will to change,” said Thompson,

“becomes harder every day that the

status quo prevails.”

The AFT study titled “The Future

Is Now: Central Valley Farmland at

The Tipping Point?” is available only

on the Internet at: www.farmland.org. 

Overseas investors purchase control

of farmer-owned ethanol plant 

Members of Lakota, Iowa, ethanol

producer Midwest Grain Processors

Cooperative, the majority owner of

MGP LLC, voted in late March to sell

60 percent of the business to Global

Ethanol Holdings of Brisbane,

Australia. The vote was 717 to 348 in

favor of the sale, a vote which represented 83 percent of the co-op’s nearly

1,300 members in10 Midwestern states. 

This $100 million sale will provide

shareholders with $3.23 per share now

and another 20 cents a share within two

years, and marks the first time an Iowa

farmer-owned ethanol plant has been

sold to a foreign investor, according to a

report in the Des Moines Register. The

offer sparked concerns about the state

losing control of a home-grown industry. The Register quotes David Nelson, a

Belmond farmer and MGP chairman, as

saying the sale will clear the way for

more outside money to come into

Iowa’s ethanol industry.

The company plans to double or

triple the 100-million-gallon ethanol

plant at Lakota and a 57-million-gallon

plant under construction in Riga,

Mich., according to a statement issued

by MGP on March 30. The company is

28 May/June 2006 / Rural Cooperatives

vate companies and even with international companies. 

The changes in state laws are mostly

being undertaken to accommodate flexibility on capital formation. When farmers come together to form a business,

whether it is for soy processing or

ethanol production, they want to access

farmer capital and outside capital. In

order to do that, these laws are providing

more flexibility to attract outside capital. 

I don’t see anything bad about that as

long as the best interest of the farmers

and producers on a co-op basis is being

served. I would guess that you will have

a lot of co-ops that will look at these different structures to see if they will help

accomplish their goals. It is really being

driven more by the need for capital formation than anything else.” 

Q. With such a large, complex business,

what steps does CHS take to ensure you get

board members with the kind of skills needed to direct it successfully. 

Toelle: “Our Member Services Dept.

provides extensive training in the country for local co-op directors. Through

our communications, we also provide

education for local directors. That

becomes the platform where they

become experienced on the local level,

and creates opportunity to seek nomination to the CHS board. 

When we become CHS board members, there is extensive, on-going education. Every year, our board participates

in education at both the local co-op and

corporate-governance levels. We use

training programs of the National

Association of Corporate Directors and

the National Council of Farmer

Cooperatives.” 

Johnson: “Election to our board is a

totally democratic process; we don’t

control who runs for board. It really

takes the best of the best to get on this

board. We make sure directors have a

good understanding of the environment

within the industries we operate in.

Four or five times per year, we bring in

industry experts to provide an outside

perspective and share their views of

these industries. Because we are global

in outlook, each year we take about a

third of the board on an international

educational trip.” 

Q. Mike, any tips on being a good board

member and maintaining good relations on

the board and with management? 

Toelle: When you are a producer

who also serves as a director, you cannot come to a meeting with your own

personal business interest in mind. You

need to make decisions that are best for

the organization. Many times you will

be faced with making a decision that

might not be best for your area or your

farm, but you need to make a decision

because it’s best for CHS. 

Foster a teamwork approach to making decisions — teamwork among

board members and between the board

and management. Treat people with

respect, even when you disagree. 

Another key to the success of CHS is

that we — the board and management

— work very hard to be open and transparent. We’ve had that culture for many

years, and it creates a high level of trust

with our members, our business partners and customers. 

Q. How do you keep the pulse of what

members want from CHS, and has this

changed significantly during your tenure?

Johnson: “Communications and listening to members is a core value for

this company, and plays a key part in

building our business plan. We do that

in a number of different ways. We have

a Members Services group that is linked

to local boards and management on a

monthly basis, and deals with businesses

strategies and developing management

skills. We have boards that are heavily

involved in director associations. 

“I spend a fair amount of time in the

country at manager association meetings. We do 13 mid-year-report meetings, the idea being to go out to our

members midway through the year and

provide them an update on how the

company is doing, rather than surprise

them at the end of the year with good

or bad news. This usually involves an

operations report, as well as an extensive workshop and question-and-answer

period. So there are a number of different touch points at the local board or

manager level to make sure we have a

sense of what their needs are and what

challenges are facing them.” ■

CHS at 75: Looking back, looking forward continued from page 11
Rural Cooperatives / May/June 2006 29

the next level of financial management,”

said Abbey Ariong, the project’s supervisor of cooperative and business development services. “Once our role of

training in how to use the software on a

day-to-day basis is done, we will then

begin training them on analysis of the

data.” 

The common system not only will

enable the client cooperatives to do a

more professional job accounting for

their funds, Ariong said, but will also

allow for comparisons among groups

and the development of industry norms

on profitability per liter and other

measures.

Proper handling and milk safety are

other major issues for cooperatives,

many of which operate milk collection

centers where members take their milk

for bulking and chilling prior to pick up

by processors. The major centers have

capacity in the range of 15,000 to

25,000 liters. The system is essentially a

spoke-and-hub system, with smaller

collection centers in the countryside

feeding into the larger centers. The

milk is transported in 50-liter stainless

steel cans delivered on everything from

trucks to bicycles.

Land O’Lakes provides assistance to

the centers on the proper hygienic handling of the milk. Training in standard

milk testing procedures has been conducted to improve the milk quality and

ensure the product is safe for consumers.

Improving products, production

Assistance to dairy processors generally focuses on improving existing products and production methods, as well as

new product development. As with U.S.

cooperatives, many Ugandan processors

are looking for ways to increase their

profitability through value-added products. The technology for making products like yogurt and ghee (a semi-liquid

form of butter) is relatively simple and

offers a realistic means of utilizing

excess milk and boosting profits. 

The project also has played a major

role in generic marketing for the dairy

industry, which is not large enough to

handle that function on its own.

Generic marketing is one of the project’s biggest components. A few years

ago, the slogan: “So have you had milk

today?” was adopted for the industry.

Similar to the milk campaign in the

United States, a series of posters were

produced featuring prominent

Ugandans promoting the consumption

of milk. 

Other marketing activities include

radio and newspaper advertisements,

sponsorship of local Dairy Days and the

nationwide June Dairy Month, and various market research activities. Based on

market research, emphasis is now being

placed on targeting activities to specifically reach young people in Uganda. 

These include advertisements in the

weekly educational supplement of the

two daily newspapers, implementing a

wall-painting competition at 100

schools in and around the capital city of

Kampala, and providing assistance to

processors who have targeted schools as

one of their primary market areas.

Uganda’s dairy industry has made

great strides over the past 10 years, but

there is much more that can be done.

The Land O’Lakes project will continue to work to increase the income of

farmers in the program, increase the

size of the formal market in relation to

the informal sector, improve the range

and quality of products, and explore the

potential for Uganda to become a major

regional exporter of milk and other

dairy products. 

■

Bottling Hope in Africa continued from page 15

also pursuing construction of a 100-million-gallon plant in Illinois. Nelson said

farmer owners have an opportunity to

continue to grow their investment in

the business alongside Global Ethanol.

Those who voted against the sale note

that the crucial difference will be that

farmers will no longer be in the drivers’

seat, and much of the profit from operations will go overseas, rather than back

into the rural Iowa economy. The

opponents of the sale said they didn’t

have enough time to convince other

investors that the deal wasn’t good

enough to give up local control. 

Foremost Farms USA 

earns $4.8 million in ‘05

Foremost Farms USA had net

income of $4.8 million in 2005, down

from $28.3 million in 2004, on total

sales of $1.4 billion — the same total

as in 2004. “The dairy industry is

confronted with some severe economic challenges,” said Duaine Kamenick,

the cooperative’s vice presidentfinance. “Commodity prices continue

to fall as milk production is increasing. This combination will likely

result in lower prices for manufactured products in 2006, which will

drive lower prices paid to milk producers.”

Foremost President Dave

Fuhrmann said, “2005 was certainly a

very different year than 2004.

However, Foremost Farms’ balance

sheet is strong and we are in a position

to meet challenges facing the dairy

industry.” 

The cooperative’s current ratio was

$1.45 in current assets to $1 in current

liabilities. Member-owners who marketed their milk through Foremost

Farms USA during 2005 will receive a

patronage allocation of $5.2 million.

Foremost, based in Baraboo, Wis.,

manufactures many varieties of cheese,

whey and whey ingredients, packaged

fluid milk, sour cream, butter and

chilled, ready-to-serve fruit juices. In

addition, the cooperative sold milk to

fluid milk handlers in four federal milk

marketing orders. 

Lansdale new CEO for

Oregon Hazelnut Growers

Hazelnut Growers of Oregon

(HGO) has named Compton ChaseLansdale as its new president and
CEO, who replaced retiring president

and CEO Len Spesert in March. 

“Compton brings to HGO a deep

general management and marketing

background, having worked with both

domestic and international agribusinesses and food manufacturers,” said

Jeff Koenig, HGO chairman. “He has

held executive positions with corporations such as the NutraSweet division

of Monsanto, the Pantaleon S.A. sugar

refining group of Guatemala, and

most recently AVEBE of Holland, a

large farmers’ cooperative and the

dominant potato starch manufacturer

globally.” Koenig noted that the new

CEO possesses the mix of management skills, cooperative knowledge

and international expertise HGO

needs “to continue our strong financial performance and global market

growth.” 

LO’L Finance Co. turns 25

with 11th year of loan growth 

Land O’Lakes Finance Co. recently

marked a quarter century of providing

financing to agricultural producers. The

wholly-owned subsidiary of Arden

Hills, Minn.-based Land O’Lakes

opened its doors Dec. 17, 1980, to help

finance agronomy receivables for local

cooperatives, as well as offer financing

for LO’L dairy and poultry producers.

Serving a growing base of customers

has been the goal of the business ever

since.

Dennis Bottjen, president and CEO,

says the company had loan volume of

$177 million in 2005, and that loan volume has increased in each of the past 11

years. The company has been profitable

in all 25 years of its existence. The

company’s customers reside in 28 states,

stretching from New York to

California. Swine makes up the largest

segment of the company’s loan portfolio. Cattle and dairy comprise the next

largest industries, respectively. The

company’s portfolio also includes customers involved in aquaculture and

poultry.

CHS director Keppy

named to FSA post 

CHS Inc. board member Glen

Keppy — who represents the co-op’s

30 May/June 2006 / Rural Cooperatives

existing plants and facilities. Further

expansion occurred during the 1970s

and 1990s. 

Agricultural cooperatives differentiate themselves from other suppliers by

their service orientation. The Middle

East oil embargo of the 1970s led cooperative suppliers such as CF and

Farmland Industries to make customer

needs paramount. 

They would not only provide a reliable source of fertilizer in time for

spring planting, but would also have

sufficient inventory to fill orders should

a severe shortage arise. 

Protecting members was a strong

dimension of CF’s organizational culture and member-owners responded

with loyalty. “We stayed in that alliance

no matter what,” one co-op official

commented. 

Loss of flexibility is a drawback of

the “ownership equals control” strategy.

The commitment to protect members

by providing assured domestic supplies

reduced CF’s profitability. 

High inventory carryovers resulted

from the commitment to guarantee that

members would not run out of fertilizer, raising CF’s cost of production over

time. 

Reluctance to source offshore

Regional cooperative ownership of

domestic fertilizer assets minimized

opportunities for CF to sell outside of

the cooperative network. Farmer-members were also sometimes hesitant to see

their cooperatives invest in offshore fertilizer assets. CF had an operating loss

of $311.3 million in 2004 (Rural

Cooperatives). 

The geographic advantage of different regions for fertilizer production

changes over time, depending on the

price of natural gas, a primary feedstock

for fertilizer. During the late 1990s

through 2003, high U.S. natural gas

prices triggered fertilizer import prices

to fall below the U.S. cost of production.

The energy crisis of the 1970s led to a

cooperative norm of assuring supply “no

matter what.” Yet, some 30 years had

passed without another supply crisis. 

Meanwhile, the fertilizer industry

had globalized. U.S. or other North

American companies were increasingly

engaged in offshore production, bringing a degree of control and security to

the U.S. industry through these investments. The growth of China and Brazil

contributed to making the fertilizer

trade international, further lowering the

probability of supply restrictions. 

Farmers once had resisted imported

product because of texture or color.

Over time, however, the quality of

imports had improved to be commensurate with domestic product. Questioning

supply reliability had become less necessary for cooperatives as their size and

marketplace clout grew. As major customers, their needs would be met.

Loyally making purchases from CF

when a competitor was closer or cheaper ultimately created losses for CF’s

owners.

These developments changed cooperative norms. In 2002, CF reassessed

its corporate mission and chose to

emphasize its financial performance

over guaranteeing an assured supply to

its owners. “Taking care of customers

no matter what means you lose money,”

one co-op manager said. Others commented: “Why am I competing for this

business; if the other supplier has a $10

transportation rate, he should get the

business.” “I can’t afford to service that

last truckload,” is more important than,

“I will never run out of product.” 

The conversion of CF was an

acknowledgement by its owners that

ownership of fertilizer assets was not a

prerequisite to securing fertilizer supplies. CF has begun to resemble the

Conversion Debate continued from page 20
members in Iowa, Missouri and

Arkansas — has been appointed by

President Bush as associate administrator for the USDA Farm Service Agency

(FSA). In his new position, Keppy will

oversee management of FSA farm and

farm loan programs and commodity

operations.

“Glen’s expertise in agriculture will

make him a valuable member of the

USDA team,” said Johanns. “I look

forward to welcoming Glen, a fellow

Iowa native, and I’m confident he will

advance USDA’s commitment of service

to our farmers and ranchers.”

Keppy and his family have owned

and operated a diversified crop and livestock family farm in eastern Iowa for 34

years. He brings both local co-op as

well as international perspective to FSA,

having traveled extensively to promote

U.S. agricultural exports in various foreign markets. 

Keppy, who has been a CHS director

since 1999, will submit his resignation

from the CHS board, at which time a

decision will be made on how to

address the vacancy. Keppy has also

served as chairman of National Pork

Board’s Foreign Trade Commission;

president of the National Pork

Producers Association and vice chairman of the Iowa Ag Value Committee,

among others. 

Book examines life of 

Wisconsin co-op leader

“Truman Torgerson, Leadership

Straight from the Shoulder” is the title

of a new book about the co-op leader

whose efforts played a key role in the

formation of the Lake to Lake Dairy

Cooperative. It also focuses on “an

intense period of dynamic organizational change in American agriculture” and

documents Torgerson’s efforts to “constantly seek institutional improvements

in governance and representation of

farm interests.” 

In addition to his work with Lake to

Lake, Torgerson was also a board member of Land O’Lakes, the Wisconsin

Council of Agriculture and the National

Milk Producers Federation, where he

exercised his leadership in defining successful principles, practices and policies

for continuing operations and the betterment of the industry. Written by his son,

Randall Torgerson, the former leader of

USDA’s cooperative program, the book

Rural Cooperatives / May/June 2006 31

“hunter” cooperative described by

Rhodes, seeking new customers and

activities whenever a profit seems likely

because retaining the organization’s

original purposes and members will

result in lack of growth, or even decline

(Rhodes:161). 

CEO’s key role

Cooperative conversion offers a

commentary on a growing split between

members and cooperatives that would

have been unthinkable in the era when

cooperatives were routinely regarded as

an extension of the farm. Conversion

represents an “arm’s length” relationship with former members that may

begin in stages as the needs of the product brand — or the brand’s customers,

such as retail chains — begin to relegate

the farmer-owners of the cooperative to

a secondary role. The farmer-owners of

the cooperative can become non-competitive within their own organization

because they don’t produce enough

product (in the case of Calavo) or

enough equity (Diamond Walnut) to

support the growth of the product

brand. 

Just as conversion represents an

internal threat to cooperative stability

and coherence, the solution to creeping

privatization is also internal. Protecting

the market share of producer-members

starts with the selection of a CEO who

is willing to make this commitment. 

Maintaining producer loyalty was a

critical issue for cooperatives in the

Nourse era of multiple cooperatives

competing for the producers’ business.

In the contemporary era, some cooperatives have tried to “think outside the

box” of cooperative values and recruit

CEOs from outside the cooperative sector. Maintaining the loyalty of the CEO

to cooperative values in an era of globalization and supply-chain economics may

be a new challenge for cooperative members, but it is one within their control.

References

• Chaddad, Fabio R. and Michael L.

Cook, The Economics of

Organization Structure Changes: A

US Perspective on Demutualization.

Annals of Public and Cooperative

Economics 75:4 2004, pp.575-594.

• Diamond Executives Due Stock at

$.001 per Share. Cooperative Business

Journal. July/August 2005, p.12.

• Hardesty, Shermain D., The Bottom

Line on the Conversion of Diamond

Walnut Growers. University of

California Giannini Foundation

Agricultural and Resource Update,

Vol. 8, No. 6, July/Aug 2005.

• Hogeland, Julie A., New Generation

Co-op, Limited Liability

Corporation, Value-Added,

Demutualized: What is Still

“Cooperative” about American

Agricultural Cooperatives?

Presentation to “The Contribution of

Cooperatives to Community

Culture,” XXI International

Cooperatives Research Conference,

Cork, Ireland, August 12, 2005.

• Morgan, R. M. and S. D. Hunt. “The

Commitment-Trust Theory of

Relationship Marketing.” Journal of

Marketing 58 (1994): 20-38.

• Nourse, E. G. (1978). “The Place of

the Cooperative Community in Our

National Economy” Reprint from

American Cooperation 1942 to 1945.

Journal of Agricultural Cooperation, 7

(1978): 105-111.

• V. James Rhodes. “Large Agricultural

Cooperatives: On the Road to

Where.” Cooperative Theory: New

Approaches. United States

Department of Agriculture,

Agricultural Cooperative Service,

ACS Service Report Number 18, July

1987, pp. 155-170.

• Stanford, Lois and Julie A. Hogeland,

Designing Organizations for a

Globalized World: Calavo’s Transition

from Cooperative to Corporation.

American Journal of Agricultural

Economics 86 (No. 5, 2004):1269-1275.

■
includes remembrances from more than

95 contributors. For more information,

visit: www.AuthorHouse.com. 

Farm labor co-op signs 

agreement with UFW

The Agricultural Labor Cooperative

of America (ALCA), a cooperative

recently formed to provide laborers to

its members, signed an agreement in

Seattle on April 11 with the United

Farm Workers of America (UFW) and

Global Horizons Inc. (a Los Angelesbased farm labor contractor), under

which the three organizations will

cooperate to provide laborers to farmers. The agreement “creates a franchise

that will allow our member farmers to

have access to productive, accountable

and reliable agricultural labor,” ALCA

President Pat Grant said in a statement

issued following the event. “We believe

that this new franchise, PAR Labor,

formed from H2A workers who will be

UFW members, is a giant step forward

in helping mitigate the shortage of farm

labor in the United States.” 

Grant said ALCA believes that the

United States faces a shortage of as

much as 500,000 farm workers for the

current growing season. The goal of the

agreement, he said, is to simplify the

process of securing laborers who are

“highly trained, process-focused and

compliant with all current immigration

regulations.” Workers will “know that

their wage and benefits condition meets

and exceeds all the requirements set

forth in the current H2A visa temporary worker program.” 

National Beef to acquire 

Brawley Beef LLC

National Beef Packing Co. LLC,

Kansas City, Mo., and its majority

owner, U.S. Premium Beef LLC

(“USPB”), have entered into a nonbinding letter of intent to acquire

Brawley Beef LLC. Brawley Beef is an

alliance of cattle producers in Arizona

and California who supply its meat

packing operations with more than

400,000 animals per year. The company

produces upscale custom cuts to retail

customers. Brawley Beef was formed by

its suppliers in 2001 and operates in

Brawley, Calif., with a new state-of-theart beef processing facility. 

National Beef is the fourth largest

beef processing company in the United

States. ■ 

32 May/June 2006 / Rural Cooperatives

Four named to 

Co-op Hall of Fame

Four cooperative business leaders were inducted into

the Cooperative Hall of Fame in May during a ceremony

at the National Press Club in Washington, D.C. The

Hall of Fame recognizes those who have made “heroic”

contributions to cooperative enterprise. The newest

inductees are: 

• Frank Morton Hunt II, a lifelong leader of the Florida

citrus industry and an advocate for strengthening service to co-op customer-owners. He is the retired president of Hunt Brothers Cooperative, Lake Wales, Fla.,

and a past chairman and president of Citrus World

Inc., which owns the Florida’s Natural orange juice

brand. He also played a major role in shaping the

Farm Credit System when the Banks for Cooperatives

were consolidated into CoBank in the 1980s.

• Thomas L. Lyon, retired CEO of Cooperative

Resources International in Shawano, Wis., a memberowned holding cooperative of three subsidiaries that

provides artificial insemination services for livestock.

He is a leader in the state, national and international

cooperative communities and has a passion for co-op

development and education. He is a former chair of

the University of Wisconsin Board of Regents and a

trustee of the Ralph Morris Foundation, The

Cooperative Foundation and the Cooperative

Development Foundation.

• David O. Miller, a farmer, businessman and director

for Nationwide Insurance, a mutual insurance company in the Fortune 100. He is a cooperative advocate in

the local, regional, national and international arenas.

As a board member of the International Cooperative

Alliance, he has also been the leading American in the

international cooperative community.

• Rebecca Allen (deceased) was co-founder of Parent

Cooperative Preschools International (PCPI),

Kensington, Md. A teacher, editor and adviser in early

childhood education, Allen believed in the co-op business model and in parent participation and control of

education. She organized PCPI, an association of

cooperative preschools, in 1960. She helped launch the

Head Start program in the 1960s. 

The Cooperative Hall of Fame was established in

1974 by the National Cooperative Business Association

and is housed at its offices in Washington. It can also be

visited on the web at: www.heroes.coop. ■

Cooperative Hall of Fame inductees, from left: Tom Lyon,

Rebecca Allen (represented by her daughter, Lucy Allen), Dave

Miller and Frank Hunt.
50 Years Ago...

From the May and June 1956 issues of News for Farmer

Cooperatives

Bulk milk handling challenge 

Dairy cooperatives face a challenge in converting to bulk

milk handling. “A cooperative’s success is measured largely in

terms of the degree to which it provides services demanded and

needed by producers. Producers need and (in many cases) are

asking their cooperatives for assistance in solving problems

associated with bulk handling methods. In converting to bulk

milk handling, cooperatives have many tasks facing them. By

setting up a successful system, these co-ops can make savings

for their members in four principal ways: through the improved

quality of the milk, reduced transportation costs, reduced

receiving 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 million

pounds in 1950. Helping to meet that demand is the Virginia

Rabbit Market Cooperative in Roanoke. The co-op began

business in 1934 with seven rabbit breeder members, with

sales that year of less than 1,000 pounds live weight. These

members were breeding rabbits chiefly for show purposes.

But they found themselves with extras and they started looking for a market for these healthy young, edible rabbits. In

1934 it wasn’t easy to sell rabbits for food because of the danger of contracting tularemia (rabbit fever). But as the years

passed, consumer demand for rabbit increased tremendously.

By 1955, co-op membership had climbed to more than 450

members 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), Kansas

City, Mo., a large regional supply cooperative serving close to

half a million farmers in nine Midwestern states. Its farm supplies move by rail, steamship, waterways, trucks and pipelines.

Farmers have a right to expect their cooperative wholesalers to

keep transportation costs to a minimum and, at the same time,

provide maximum services. CCA’s members are concerned

with the movement of supplies from the purchase of raw materials through processing and manufacturing, storage and intraplant handling, packing and shipping and on to delivery to

local 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 vice

president and general manager of National Rural Electric

Cooperative Association, told a group of cooperative association editors. If the nation cannot solve its energy shortages, it

runs the risk of perhaps eventually becoming a “fourth- or

fifth-rate world power.” The 10 issues include: (1) dependency on oil from abroad; (2) failure to conserve energy; (3)

necessity of shifting more to electricity; (4) commitments to

rapid cleanup of air and water; (5) accelerated research and

development of alternative sources of energy; (6) reliance on

price as the regulator of the energy field; (7) lack of governmental commitment and determination to develop a national

energy policy; (8) factor of public fear and doubt; (9) monopoly 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 regional farmer cooperative based at Jackson, Miss. MFC has been

selected by Mississippi State College Board as sole international production and marketing agent for the super food bar.

The board selected MFC because the cooperative already had

the marketing machinery and expertise to make the product

available worldwide. Iran is planning a school food program

and the Shah is interested in a high-protein food supplement

to be included. The Shah’s specifications call for: individually

wrapped snack bars that provide 200-300 calories of protein,

that no refrigeration be required and that cost per serving be

18 to 20 cents. The team came up with four types of food

bars: brownie, toffee, oatmeal and sweet potato, with oatmeal

being the flavor most favored in Iran. 

Rural Cooperatives / May/June 2006 33

P A GE FROM THE PAST

From the archives of Rural Cooperatives

and its predecessor magazines

May and June 1956 issues
34 May/June 2006 / Rural Cooperatives

Indiana co-op’s 50th year gilded by records 

“Indiana’s largest agricultural gathering — drawing about

15,000 people — observed the golden anniversary of Indiana

Farm Bureau Cooperative Association Inc. The 50th annual

meeting was the setting for special observances and reports of

the cooperative’s record year in sales and net savings during

1975.” In commenting on the annual meeting’s theme of “50

Years in Progress,” Harold P. Jordan, special assistant to the

general manager and recently retired as the cooperative’s

general manager, noted that agriculture’s advance “did not

come by accident or good fortune. It came about because a

lot of people on the farm, at Purdue University, in USDA

and in this and other cooperatives worked together to make

agriculture more efficient, to produce more wholesome,

nutritious food for consumers and to provide more adequate

and 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. Phillip

Baumel in an article on ethical standards for co-ops. “Early

cooperative leaders recognized that they needed to sharply

differentiate themselves from traditional private sector businesses. A key ingredient to achieving cooperation was

establishing rapport and building trust with and among

producers. The early organizing efforts stressed the

importance of farmer control, honesty, integrity and

high ethical standards. This attention to honest business practices and treating all patrons fairly attracted

many new members. Trust and commitment to ethical

business practices provide the basis for cooperation and

are essential for people to join together and work for

mutual goals. Without trust, people do not communicate 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 of

construction, according to Harvest States Cooperatives of St.

Paul, Minn. The mill is being built for Amber Milling Co., a

division of Harvest States. It will process hard-red winter and

spring wheat to produce bread flour. The Houston mill is the

second of three new, hard-red winter wheat mills to be built

by Harvest States and Amber Milling to bring more of the

food dollar back to member-producers. Unlike the cooperative’s mill at Kenosha, Wis., which has adjoining grain storage tanks, a nearby grain elevator operated by the Houston

Port Authority is available for unloading and storing incoming 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 level

has left many rural communities struggling to maintain or

establish needed health care facilities and related social services. When the health of our rural population is negatively

affected, it increases the odds of a general economic downturn.

A healthy community may be able to withstand an economic

crisis, but when health services are eroding, economic stress is

compounded and the viability of rural communities is threatened. The reduction or elimination of many costly health and

human services programs could have a severe impact on rural

America. To plan for even

the best-case scenario in

this setting, rural communities need to be innovative

and collaborate. They need

to begin planning now, if

they haven’t already done

so. Eagle County, Colo., is

developing an innovative,

shared-services agency that

operates on cooperative

principles and is surmounting these negative trends

and improving the delivery

of health and human services to its residents.” ■

May and June 1976 issues

May/June 1996 issue
Rural Cooperatives / May/June 2006 35

By Jack Gleason,

Acting Administrator 

USDA Rural Development 

Business and Cooperative

Programs

nergy is a key part of

President Bush’s domestic

agenda, and one of the

newer loan guarantee programs available through

USDA Rural Development is the

Renewable Energy and Efficiency loan

program. These loans are designed to

encourage agricultural producers and

small rural businesses to create renewable and energy-efficient systems. 

Two generations of the Neppel family operate Neppel Farms Inc., in

Armstrong, Iowa, a 2,000-acre, grain

and livestock farm, which includes a

3,400-head sow confinement operation

and 16,000 hogs. It also markets 200

cattle annually.

Faced with an annual electric bill

from their livestock operation that

exceeded $200,000 per year, the

Neppels decided to pursue their own

windmill after taking a closer look at

two wind turbines of the nearby Spirit

Lake School district.

The farm received a $402,500 Renewable Energy Systems grant from

USDA Rural Development to install a

1.5 MW wind turbine. It also received a

$250,000 interest-free loan from the

Iowa Energy Center and a loan for the

balance from their local lender. Total

project cost was $1.6 million.

In addition to help from USDA

Rural Development staff in Iowa, the

Neppel family also worked with a professional grant writer. The 1.5 MW turbine went on-line in August, 2004, and

is now producing close to 5 million

kilowatt-hours of electricity annually,

enough to light up 400 Iowa homes for

a year. The electricity is being purchased by Alliant Energy under a longterm contract. The family calculates

that is should achieve return on investment in 15 years.

The Neppels say the best way to

avoid or limit start-up problems is to

make sure you “work with a first-class

contractor” with a solid track record.

They also advise securing power-purchase and interconnection agreements

early in the process, and to secure a

warranty and maintenance contract.

Their success with wind power is also

prompting interest from others in the

area to put up their own turbines. 

Another example of a successful

energy start up is in the town of

Luverne, Minn., where Agri-Energy

LLC is located. This company is located in the southwestern corner of

Minnesota, surrounded by corn and

soybean farms. 

This project began producing

ethanol in 1998 as a 12-million-gallonper-year dry-mill plant using 10 million

bushels of corn annually from its members. In 1998, USDA Rural Development provided a Business and Industry

loan guarantee on a $5 million loan to

construct the plant. This project was

the first of its kind in Minnesota. 

Three years later, Rural Development was approached by another

lender, Heartland Business Bank of

Wisconsin, to guarantee another $5

million loan to refinance debts at a

lower rate and to expand the ethanol

plant. The company has continued to

perform in an exceptional manner.

Agri-Energy currently has about $24

million in annual sales. 

This plant employs local residents,

buys approximately 10 million bushels

of corn per year from local farmermembers and increases their income by

selling a value-added product derived

from corn. 

USDA Rural Development is a venture capital source for rural America

and has $17 billion to invest in the rural

economy this year. For more information on the Renewable Energy and

Efficiency program or our other guaranteed loan programs, contact a Rural

Development office in your state, which

you can find listed on our website:

www.rurdev.usda.gov. We look forward

to working with you. ■

Wind, biofuel projects funded

INSIDE RURAL DEVELOPMENT

Paul Neppel and his family used a

Renewable Energy Grant from USDA/

RD to erect this windmill on their Iowa

farm. USDA photo by Kate Evans 

E
36 May/June 2006 / Rural Cooperatives

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