R

u

ral COOPERATIVES

USDA / Rural Development January/February 2009

M a k i n g a M a r k e t

Co-ops face global marketing challenges

Page 4
Editor’s note: The Institute for Local Self Reliance’s mission is to

provide innovative strategies, working models and timely

information to support environmentally sound and equitable

community development.

he history of biofuel production is one of

local ownership found and then lost. After the

early industry ascent and crash in the 1980s,

and the resulting domination by wet mills

owned by Archer Daniels Midland (ADM)

into the early 1990s, a third era in the ethanol

industry emerged, with farmer-owned ethanol plants. Initially

very small, these plants expanded as corn farmers profited

from investing in a green business, for which they grew the

feedstock and the fortunes of which rose as corn prices fell. 

It was a symbiotic relationship, marrying renewable energy

with agricultural and rural development policy and bringing

significant economic benefits to the investing farmers and

their communities. 

Up until 2003, these plants owned by farmer cooperatives

and LLCs were the mainstay of the industry. About half of all

ethanol refineries and up to 80 percent of all new ethanol

plants that year were majority farmer-owned. 

Then, in 2006, a combination of rising oil prices and a

rapid phase-out of ethanol’s octane-enhancing alternative,

MTBE, led to soaring profits in the ethanol industry, catching

the eye of Wall Street. The entry of investment firms resulted

in dramatic changes in the industry. Wall Street firms built

large, absentee-owned ethanol plants with highly leveraged

dollars. 

These plants dissolved the traditional relationship between

farmer and ethanol producer, erasing the hedge advantage —

where farmer-owned ethanol plants benefited if 

corn prices were low or high — and the connection between

value-added agriculture industry and sustainable rural

development. Wall Street, unlike farmers, was more interested

in the short-term appreciation of its capital investment via

quick sales of new plants, rather than long-term dividends

from producing ethanol. 

The entrance of Wall Street conferred one advantage,

however. It brought the political power needed to pass an

ambitious Renewable Fuel Standard that called for 15 billion

gallons of corn ethanol by 2015 and for an entirely new

cellulosic ethanol industry to produce at least 100 million

gallons by 2010. 

But at the beginning of 2009, plummeting oil prices and

still relatively high corn prices curbed Wall Street enthusiasm

and led to a wave of acquisitions, industry concentration and

plant closures. At the same time, federal incentives and

mandates have attracted substantial investment in ethanol

produced from new, non-food and cellulosic feedstock. 

The time is right to redesign public policy to re-establish

the intimate and beneficial linkage between energy and

agricultural objectives that was present in the early years of

this century. To achieve this, the federal government should

redesign the federal biofuels incentive in the way Minnesota

did 20 years ago.

Minnesota converted a pump credit similar to the present

federal incentive into a direct production payment for each

gallon produced by an in-state plant up to 15 million gallons a

year. The incentive lasted 10 years. That policy intentionally

fostered small-scale plants that lent themselves to farmer

ownership. It also led to increased competition and innovation

for many producers. 

The current federal biofuel tax credit, unlike the Minnesota

incentive, favors large-scale plants. Ethanol plants are

increasingly large and the average size of an absentee-owned

ethanol plant is twice that of a locally owned one: 62 million

vs. 37 million gallons. 

Most recently built plants have a capacity of 100 million

gallons or more per year. The economies of scale in ethanol

plants larger than 30 million gallons are very small and any

cost reductions are unlikely to appear at the gas pump. In a

report, “Rural Power,” ILSR found these savings to be less

than 6 cents per gallon. 

Encouraging modest-scale production facilities will not

raise prices at the pump, but it will encourage local ownership

through cooperatives or other business forms and will

dramatically increase the economic benefits generated in the

communities in which the feedstock is cultivated or harvested. 

Given two identically sized ethanol plants, a locally owned

plant provides a 10- to 30-percent greater economic impact in

its community than an absentee-owned plant. Unit price

scales with size (to a point), but economic impact scales with

local ownership. 

The federal credit for biofuels should be redesigned to

have two tiers: a higher direct payment to smaller, majority

locally owned plants and a lower payment to absentee-owned

larger plants commensurate with their social benefits.

— By John Farrell, Research Associate 

Institute for Local Self Reliance (ILSR) ■

2 January/February 2009 / Rural Cooperatives

Commentary 

Local ownership of biofuel yields 

greatest benefit for rural America

T
Rural Cooperatives / January/February 2009 3

Rural Cooperatives (1088-8845) is published

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R

u

ral COOPERATIVES

January/February 2009 Volume 76 Number 1

p. 4

p. 8

p. 16

p. 22

O n t h e C o v e r :

Blueberry growers in Michigan say they view their cooperative not

just as a home for their crop, but as a support system for members.

Some of the global supply-chain marketing issues facing co-ops are

examined, beginning on page 4. Photo Courtesy Wild Blueberry

Growers of North America

F E A T U R E S

4 Making a Market

Co-ops facing challenges of global supply-chain economics

By Julie Hogeland

8 So Far, So Good

Potato co-op achieving mission to bring stability to market

By Stephen Thompson

10 Building a Bridge for Ownership Succession

Worker co-ops, ESOPS help keep business doors open 

By Bruce Reynolds

16 Calcot surviving in floundering cotton industry

By Harry Cline

18 Switching On Cow Power

Co-ops can play role in turning dairy waste into energy, byproducts

By Carolyn Liebrand, Charles Ling

22 Opportunities for co-op ownership of cellulosic

ethanol

By David Chesnick, Anthony Crooks, Alan Borst, Robin Robinson

26 New financing mechanisms for renewable energy

28 Managing Risk

Farmer Co-op Conference eyes strategies for business in volatile markets

By Lynn Pittman

32 News that Gets Used

Media tips and war stories abound at CCA roundtable

By Dan Campbell

D E P A R T M E N T S

2 COMMENTARY

13 UTILITY CO-OP CONNECTION

14 VALUE-ADDED CORNER

34 NEWSL INE
Julie A. Hogeland, Ag Economist

USDA Rural Development

Global market

expansion is forcing

cooperatives to draw

upon historic strengths

to resolve

contradictions and problems emerging

from modern supply-chain marketing.

One expectation associated with supplychain economics is that greater

efficiency and coordination will result

from reducing conflict within the

supply chain. “A frictionless

marketplace” will emerge from a

smoothly functioning, logistically

optimal supply chain in which partners

share a common customer focus

(Wysocki). 

This idealistic, optimistic vision

obscures how intense competition and

even market failure remain persistent

features of the marketplace, challenging

cooperatives to protect their assets,

producer-members and customers.

Global retailers such as Tesco,

Carrefour and Wal-Mart are battling

for market share within China, India,

South America and the privatizing

economies of Russia and Eastern

Europe. Projections from 2007 suggest

that these emerging economies will

grow three to five times faster than

Europe, North America and Japan,

according to Michigan State University

Professor Thomas Reardon. Growth

potential on this scale has triggered a

competitive struggle Reardon regards as

“fierce” — a struggle invariably with

cooperative ramifications, the topic of

this article.

The August 2008 food-poisoning

crisis in China, caused by the addition

of melamine to milk supplies,

profoundly impacted New Zealand

dairy cooperative Fonterra, revealing

some of the risks of being a “first

mover” or early market entrant.

Motivated to form a joint venture by

the prospect of becoming China’s

leading dairy producer, Fonterra

assumed a 43-percent ownership stake

in Chinese milk distributor Sanlu in

2005. 

The Chinese dairy industry was only

partially industrialized, by Western

standards. Agricultural norms, values

and processes understood in a Western

context did not come “packaged” along

4 January/February 2009 / Rural Cooperatives

Co-ops 

facing challenges

of global supply-chain economics 

G

Making

a Market
with new processing technology.

Squeezed by inflation and governmentimposed price limits, farmers realized

the importance of reducing costs and

maximizing profits. Less apparent

within China was a clear understanding

of industrialization’s goal of meeting

consumer needs even before they are

articulated.

California co-ops initiate

value-added strategy

Within the United States, Upton

Sinclair’s pro-socialist novel, “The

Jungle,” helped reform capitalism early

in the 20th century by encouraging

greater public awareness and

accountability for food safety. The

legacy of hacienda production — large,

Spanish-influenced estates or

plantations — enabled California to

industrialize agriculture several decades

before the rest of the United States.

Hallmarks of industrialization — such

as a business attitude toward farming,

contract production, large-scale

mechanized farming and organization

for export markets — were evident by

1910 or 1920. 

In 1923, California attorney Aaron

Sapiro drew the outline of the

contemporary value-added cooperative

by summarizing the attributes that

made cooperatives, such as Sunkist,

Sun-Maid and Sunsweet, successful. He

saw cooperatives bringing order to

chaotic markets by preserving a

commodity so that it could be released

on the market gradually, not dumped at

harvest. Yet, Sapiro’s market-driven

emphasis — he did not consider a

product marketed until it was actually

sold — was not completely understood

by farmers who pinched pennies to

keep their farms going. 

The Spartan outlook of economist

Edwin Nourse resonated with such

farmers. Why did so many cereal

brands exist in 1922, Nourse asked,

when he found that his own brand was

perfectly adequate? He concluded that

brand proliferation and advertising were

opportunities for food manufacturers or

middlemen to ladle monopolistic profits

or surcharges on to the price of food. 

Cooperative marketing — stripped

of such excess and established on a

straightforward, cost-of-service basis —

appeared to be more transparent and

conducive to revealing a true supplyand-demanddetermined price.

Other economists said

that excessive

marketing costs seemed

to be the result of too

many middlemen

competing against each

other at a time when

farmers seemed to be

getting less than their

fair share of the retail

dollar. 

A culture of marketing

conservatism was

endorsed within the

1971 edition of

“American

Cooperation,” which

proposed that the

introduction,

promotion and

advertising of so-called

“new foods” did little

more than add to the

cost of food. “There are really very few

really new products, with frozen orange

juice, instant mashed potatoes and now

a new fried milk curd product being the

only really new products,” it said. Not

until value-added potential emerged

from Midwestern crops such as

sugarbeets, grains (identitypreservation) and corn (ethanol) in the

late 20th century did Midwestern

producers (other than dairy or pork

farmers) become as “market driven” as

had California specialty crop producers

some 50 years earlier. 

This pattern suggests that values and

norms emerge from a local context; it is

difficult to import them from one

context (e.g., the West or California) to

another. 

Technological and infrastructure

requirements for rapid industrialization

complicate the development of new

values and behaviors when norms and

standards cannot be transmitted or

imposed from the “outside.” During the

melamine crisis, Chinese milk tests

were unable to differentiate between

chemical or man-made protein and

natural amino acids. The Washington

Post reported that dairy cows were new

to Chinese farmers; they did not know

how to feed and care for them (October

20, 2008). 

In 2007, an economic team led by

Dr. Jikum Huang concluded that the

spot-market exchange routinely used by

Chinese apple and grape growers did

not generate the transaction trail

necessary for a successful trace-back

system. Contract marketing and

extension services were practically

nonexistent.

Market failure challenges

Another challenge for cooperatives is

market failure: could it limit or render

ineffective what cooperatives are doing?

Market failure has been defined as

market deviation from the ideal. Yet,

“the new economic paradigm for

agriculture accepts some imperfect

competition [or market concentration]

in the food and agriculture sector for

the sake of economic efficiency,

technological progress and rising living

Rural Cooperatives / January/February 2009 5

Sunsweet’s PlumSweets are helping the co-op target a new,

younger demographic. Facing page: Berry co-op Naturipe

has become a year-round fruit marketer. Photos courtesy

Sunsweet and Naturipe
standards” (Persaud and Tweeten 2002).

For this reason, aligning the incentives

between different components of the

supply chain has perhaps been

emphasized more as a collective

marketing strategy in recent years than

the potentially adversarial — but still

traditional — cooperative role of

correcting or compensating for market

failure. 

Nonetheless, both subtle and

spectacular examples of market failure

continue to exist. In May 2007, CHS

President and CEO John Johnson told

this writer that: “Emerging markets

offer growth, but also significant risk

because the sources of demand and

supply are not clear.” This comment

seems prescient, considering the

situation with

melamine in

China. 

One of the consequences of the

fierce competition among retailers is

that suppliers may be “de-listed” for

failing to provide the continuous

leadership in market development and

procurement demanded by the chains.

This is an example of how Reardon

expects long-term supplier bargaining

power to decline as the chains become

more concentrated.

Coming to terms with monopolistic

elements in the economy is an

important challenge for agricultural

economies in transition and for

vulnerable producer groups. The

burden of adjusting to agricultural

industrialization fell hardest on small

producers in the United States because

they were the largest producer group

for most of the 20th century. Small

Chinese farmers will likely absorb the

impact of the melamine crisis because it

is easier to control or monitor a small

number of large operations for food

safety compared with the fragmented

supply chain these producers represent. 

Reardon anticipates that, as global

retailers spearhead the process of

consolidating, integrating and

modernizing fragmented, traditional

supply chains, they will develop private

standards of product quality and safety.

At this point, private standards mainly

reflect produce size, color, blemishes

(or other damage) and foreign matter,

not necessarily safety concerns.

Competition between supply chains

based on private standards is expected

to replace competition between

individual firms. 

Private standards compensate for

spotty enforcement of public standards

within emerging markets. For the

burgeoning number of emerging

market consumers with middle class

incomes, private standards will resolve

the inconsistency between loose

standards for local consumption

compared with tighter export standards.

Co-ops can help build

trust in marketplace

Fundamentally, Sapiro’s orderly

marketing norm facilitated producer

trust in market exchange based on the

kind of market knowledge — the

commodity grades and standards

developed by cooperatives — that have

become the basis of contemporary food

safety and security (Hogeland,

forthcoming report). Contemporary

consumers are not unlike the producers

of the early 20th century who needed to

know how their fruit was graded and

how different grades compared in value

before they could have confidence in

the market. Lack of trust in market

exchange causes significant economic

underdevelopment, according to

economist Kenneth Arrow. Cooperative

norms or values can compensate for

such mistrust and allow markets to

develop.

Product identity standards protect

consumers from fraudulent or deceptive

practices; grades categorize

commodities according to economically

significant attributes. Both reduce the

transaction costs of commodity markets.

Reardon notes how grades and

standards are emerging as a tool for

product differentiation and market

segmentation. Companies are now

positioning themselves by product

attributes.

Process-control technology now

provides information on how product

attributes and outcomes, such as calorie

reduction or organic production, are

biologically created and maintained in

the sequence of production. The

process begins with plant genetics, then

cultural practices, inventory, handling

and on through processing. The result

is a more substantive basis for

nutritional claims and food safety traceback programs.

Being innovative and a trend-setter is

a particular focus of MBG Marketing,

“The Blueberry People,” 300-member

cooperative headquartered in Grand

Junction, Mich. As the world’s largest

6 January/February 2009 / Rural Cooperatives

The Thomas family harvests blueberries, which will be marketed

through their co-op, Michigan Blueberry Growers. Photo courtesy

MBG; Close-up of berries, photo by Rufus Isaacs, courtesy Michigan

State University

continued on page 42
Michigan Blueberry Growers’

(MBG) membership of 300

producers represents a

combination of both very small

and very large growers. Director

Allen Miles, a large grower,

chose to become a MBG member

because the cooperative was

more cost-effective than using a

broker or other sales force. 

The cooperative operates on a

cost-plus basis. MBG is not a “for

profit” company, but is a “for

grower” company. MBG also guarantees that it will sell

every blueberry a member produces — this

is the cooperative as the proverbial “home

for the growers’ product.” 

“MBG is more than just a home, it’s a

support system!” stresses Director Pat

Goin. She and her husband, members

since 1980, represent small producers. “If

you want to be a quality producer, MBG is

interested in you,” she says. 

The cooperative fosters strong support

from growers through a member horticultural

program which Goin calls “phenomenal.”

Rapid payout after harvest promotes enthusiastic member commitment to marketing

their entire crop through the co-op. All

members undergo an audit each year,

choosing among a PRIMUS audit (requiring a

crew trained in food safety and hygiene), a selfaudit, an MBG audit, a GlobalGAP (non-genetically

modified organisms) for European export, and an

AIG (or American Institute of Baking) audit. MBG

approves processing facilities according to a

“Process 2001” Program, which requires use of a

Food Safety and Quality system. 

By “providing a home for the growers’ product,”

cooperatives risk excess inventory accumulation

when markets mature or harvests are

overabundant. Prolonged inventory carryover has

undermined marketing boards that operated on a similar

principle of storing product until prices rose. 

American cooperatives have the option of restricting

membership (closing the cooperative) when challenged by

oversupply or stimulating demand.

Choosing the latter, Sunsweet

recast prunes as a “candynutrient” by individually wrapping

perfect, moist prunes in

cellophane, making them a

“snack-on-the-go” branded as

“Sunsweet Ones.” The product

launch was supported by a

$500,000 Value-Added Producer

Grant (VAPG) from USDA Rural

Development.

In 2007, Sunsweet began

marketing a light, low-calorie version of its PlumSmart®

juice product, aided by a $300,000 VAPG from

USDA. PlumSmart Light is made from fresh

prune plums which normally are less visually

appealing than the varieties grown for

fresh markets. Made from fresh plums,

PlumSmart Light is cost-efficient because

growers avoid the expense of drying fruit.

PlumSweets — dark chocolate-coated

prune bits introduced by Sunsweet in 2005

— are an imaginative product far removed

from the stodgy compotes and stewed

prunes of Nourse’s day. PlumSweets satisfy a

sweet craving and add an extra dose of

nutrition through the reputed antioxidant

power of dark chocolate. 

Younger consumers are the target

market for this product. Through “slicing and

dicing” the market, as economist Joe Coffey used to

say, the catch-all category of “consumers” can be

mined to reveal highly specific attributes and wants.

Sensitive to another category of consumers,

Sunsweet introduced “60 Calorie Packs” in 2008.

Both PlumSweets and the “60 Calorie Packs”

received VAGP support from USDA.

Because the PlumSmart line represents pruneplums as snacks, nutrition-on-the-go, or food with

specific nutritional claims, it requires advertising to

engage consumer attention and interest. These

products cannot just sit on a shelf. New product

development — making a market — is the contemporary

justification for providing a home for the growers’ product. 

— By Julie Hogeland

Rural Cooperatives / January/February 2009 7

Co-op not just a home, but a support system for members 

Members of the Wassink family check their

blueberry crop (top). Sunsweet’s PlumSmart

Light juice and Sunsweet Ones have proven

popular with consumers.
By Stephen Thompson,

Assistant Editor 

n the fourth

anniversary of its

founding, United

Potato Growers of

America is successfully

carrying out its mandate. It is

protecting its growers from market

volatility — not by focusing exclusively

on restricting their production, but

most importantly by giving them the

information they need to make good

decisions.

In 2004, potato farmers were facing a

crisis. They were used to a rather

unique way of doing business: an

average of three out of five years they

would lose money on their crops. Two

of those years they’d make enough

money to make up their losses and turn

a profit.

Although it wasn’t an ideal way to do

business, many producers managed to

prosper. But then things started to go

south. Potato consumption fell, in part

because of the popularity of low-carb

diets. Prices fell, too. Potato farmers

started looking for a way to stabilize the

market.

The result was a new national

growers’ cooperative (featured in Rural

Cooperatives in the March/April 2004

issue, shortly after it was formally

organized at a meeting in Washington,

D.C.). Idaho potato grower Albert

Wada, the founding board chairman of

the co-op, had started United Fresh

Potato Growers of Idaho the year

before. He thought the best remedy for

the huge market fluctuations was to

form a federation of state co-ops that

would work to better balance supply to

demand. 

Wada’s idea was embodied in the

“United We Stand” program, which

sought to better target production for

market demand much the same way

U.S. dairy farmers have achieved.

Central to the plan was improving

communications regarding market

conditions and local growing conditions

between members and their state coops, and between the state

organizations and the national

cooperative. 

Using the information gathered, the

program called for withdrawing a

calculated percentage of acreage from

production, if necessary. If that didn’t

do the trick, the next step would be

restricting harvests. To make the

program work, the cooperative would

need a “critical mass” of farmers in each

potato-growing region of the country.

Substantial progress

Today, United Potato Growers has

succeeded in making potato growing

profitable again, but it has managed to

avoid taking formal post-planting

actions to decrease supply. Instead, says

current President and CEO Lee

Frankel, most of its success is the result

of educating growers to be better

businessmen and giving them the

market information they need to make

the right decisions. 

“Our plan has shifted from

exclusively reducing acreage to defining

the market,” says Frankel. 

Board Chairman Allan Floyd helped

found the co-op’s Pacific Northwest

affiliate, United Fresh Potato Growers

of Washington/Oregon. He puts it

another way: “It used to be people just

planted the crop and hoped for the best.

Nobody knew what the total

consumption of potatoes was.” 

Now, he says, for the first time

growers have an accurate idea of supply

and demand, and can choose how much

to plant using that information. “We’ve

all dropped acres, because we were just

8 January/February 2009 / Rural Cooperatives

I

Potato co-op

achieving mission

to bring some

stability to market 
Rural Cooperatives / January/February 2009 9

growing too many potatoes,” he says.

Key to the co-op’s success is its

ability to gather and analyze potato

market information. This data is

gathered from growers, government

agencies (such as the USDA National

Agricultural Statistics Service), potato

shippers, the food industry and other

sources. The national co-op then

generates a market analysis. 

Using these data and the analysis

developed by the national co-op,

members meet and decide informally

on how many acres to plant that year. 

Frankel says that some of the acreage

reduction has come about through

buyouts and mergers, some of which

combine different customer bases and

thus allow for more marketing

flexibility. He notes that members of

state co-ops sometimes informally trade

planting “rights.”

Gauging the market accurately

Having accurate market information

also allows the co-op to use surpluses in

one area to fill needs in others. “Last

fall we identified in advance an excess of

red potatoes in one region,” says

Frankel. “We were able to find a home

for those potatoes with other growers

who had contractual obligations they

needed to fill.”

In some cases, delaying shipments to

market by a week or two can make the

difference between having an

oversupply and getting a satisfactory

price. At other times, when prices are

low, members have access to additional

data to help them determine if prices

will be more favorable later, allowing

farmers to reap profits. 

The point is to ensure predictable

income without wild pricing swings.

Frankel says, “Our goal is normal

profits, making sure prices are even. We

want sustainable pricing levels.”

The cooperative’s effectiveness is

enhanced by its continued growth.

Membership in the affiliated regional

co-ops keeps increasing, and recently

farmers in Minnesota’s Red River Valley

and in the Southwest came on board

with their own affiliated co-ops.

There’s still room for growth,

however. “I guess the definition of

‘critical mass’ is different for

everybody,” says Floyd. “We’re not as

big as I’d like us to be, but we’re getting

bigger, and our members are happy.” 

Frankel says it is possible that an

oversupply at some future time could

require formally withdrawing product

from the market, according to the

original blueprint. 

“We’ve had luck on our side for the

last four years,” he says. “The weather

has cooperated in keeping things on the

trend lines. We may get a year with 10-

percent higher yields, and then we’d

have to fall back on other methods.” 

The current economic downturn

may bring new challenges, too. But, he

says, “So far, so good.” ■

Photo courtesy United Potato Growers of America
10 January/February 2009 / Rural Cooperatives

By Bruce J. Reynolds, Economist

USDA Rural Development

usinesses of all sizes struggle to stay afloat during recessions, with some

eventually having to close. But small, family-owned businesses can

sometimes close even during good times for the general economy when

the owner retires. Such closures can have a major, negative impact on a

rural community. 

Whether or not these businesses continue to operate after being sold may not be a

primary concern to many retirees. If the owner’s grown children are not interested in

keeping the family business in operation, an outsider may purchase the enterprise and

decide to cease the operations there. Typical buyers of small businesses are competitors

seeking more customers and inventory. They may want to consolidate rather than

increase their business locations. 

Building a Bridge for

Ownership Succession 

Workers created an ESOP to gain ownership of Doucette Industries

in York, Pa. Photo by John Lebo, courtesy Doucette Industries 
A net loss for rural communities

Businesses that acquire other businesses will likely close

the new operating locations they’ve acquired when the cost

reduction of closure is larger than the expected loss in

revenue. This result depends on serving the same customer

base with fewer operating locations. 

The acquiring business may even gain from closing

operating locations that, prior to the acquisition, were

economically self-sustaining. Yet, from the standpoint of the

local economy, this benefit for a business from closing newly

acquired locations is likely far outweighed by the costs of job

losses and less convenient service for local customers. 

In many rural areas the former employees of a closed

business cannot find jobs without moving out of the area. For

local customers in rural communities the closing of a business

is often not merely a reduction in consumer choice, but a

major inconvenience when it means having to travel much

farther distances for shopping. If retiring owners care about

the survival of the business they built, they can take

preparatory steps to accomplish this result prior to their

retirement.

Succession planning

An alternative to selling small businesses to competitors is

for owners to develop a succession plan as a component of

their retirement plan. 

When the owners’ children are interested in keeping the

family business, a relatively simple succession plan can be

worked out. When their children or other family members

are not interested, retiring owners often neglect to initiate

the process of succession planning before they retire. 

If owners want their business to survive but are

considering a sale to non-family members, succession

planning is more complex. The original owner and potential

new owners (often the employees) must have a plan for

management that will keep the business operated as

effectively as it was under its former family-owners. 

Some small business owners may not be aware of potential

tax savings from selling their businesses to employees. A welldesigned succession plan is essential to transferring

ownership to employees in a way that will qualify for tax

savings. 

1042 Rollover

Changes in federal tax laws in 1984 created a special

incentive for owners who sell their company to its employees.

Capital gains taxes on stock sold to employees can be

deferred by using the sales proceeds to purchase stock in

some other U.S. company. This opportunity for tax deferral

on the sale of a business is dubbed the “1042 rollover.” It

creates an incentive for proprietors or owners in a closely

held business to develop a succession plan of transferring

ownership to their employees. 

The 1042 rollover has been predominantly applied to

ownership transfers under the terms of Employee Stock

Ownership Plans (ESOPs). It has been infrequently applied

to transferring ownership to worker cooperatives. One reason

for this is that many cooperative incorporation statutes

require 100-percent ownership by employees within a

relatively brief period of transition. 

Accomplishing a 100-percent purchase of a company by

employees can take three to five years and be financially

prohibitive. Whether organized as an ESOP or a worker

cooperative, 30 percent of the stock must be purchased in the

first year as the minimum amount to qualify for a 1042

rollover. But ownership by a worker cooperative as compared

to an ESOP would require a larger loan, due to the 100-

percent equity requirement. 

The ESOP is flexible in this regard because if outside

investors own 70 percent of a company, they can gradually

transfer more ownership to employees and take the tax

deferral on all incremental sales transfers. However, ESOPs

involve more administrative cost because of their regulatory

linkage to the Employee Retirement Income Security Act

(ERISA). Such costs include the appointment of a trustee to

administer the reporting requirements for holding employee

shares as part of their retirement plan and having an annual

appraisal of the firm’s value. 

A worker cooperative is not subject to ERISA regulations,

so it is a cost-effective form of ownership for businesses with

relatively small employment and modest earnings. 

Financing employee ownership

To be an employee-owned firm, a majority share of a

company’s stock must be held by the employees. The

purchase of a sufficient amount of stock shares by employees

to establish ownership and control of a business, whether

organized as an ESOP or a worker cooperative, almost always

depends on receiving a bank loan. 

Lending to an ongoing concern for transferring ownership

is usually less risky than a loan for a business start-up. Yet, a

bank will consider the amount of debt the business is

currently carrying and the effect of adding more with a new

loan for the employee stock purchase. Another risk factor for

the bank in making such a loan is how well the business will

Rural Cooperatives / January/February 2009 11

Worker co-ops and ESOPs can

help keep doors open when

business owners retire
12 January/February 2009 / Rural Cooperatives

function under employee ownership and control. 

Business & Industry Loan Guarantees

USDA Rural Development is authorized to provide loan

guarantees for lenders who finance infrastructure and

business development under its Business and Industry (B&I)

Guaranteed Loan Program (for more information, visit:

www.rurdev.usda.gov/rbs/busp/b&i_gar.htm). 

The general objective of this program is to improve the

economy and quality of rural life. A B&I loan guarantee from

USDA reduces a bank’s risk to only 20 percent in the event of

default on loans of $5 million or less. When used for

employee ownership of businesses with a solid track-record

and sound plan for the future, this program saves jobs and

improves commercial and retail services in rural America.

Assisting a business that operates profitably in a given

location to continue to operate after its owners put it up for

sale fully meets the mission area objective. 

Applying for a USDA B&I loan guarantee to support

employee ownership can make many businesses more

sustainable than they would be under a narrow ownership by

a single entrepreneur. A more widely distributed ownership

held by employees removes periodic discontinuity each time

a major or single owner seeks an exit strategy for retirement. 

A wide range in age distribution of employee-owners can

stabilize a business from the standpoint of continuity in

leadership, experience and critical skills as retirements

periodically occur. Employees are highly motivated to keep a

business going because their jobs are at stake. 

As of early 2008, only two B&I loan guarantees had been

made for employee ownership of a business. Both of these

guarantees were made to transition two family-owned

businesses into ESOPs. Both were provided by USDA Rural

Development’s Pennsylvania office. One was an electrician

service company. The other is described in more detail below.

Doucette Industries Inc.

The term “small business” is defined as a business with

less than 500 employees, which comprises a wide range of

companies in terms of employment, but also in the volume of

sales, assets and management complexity. Two examples of

small businesses in rural communities with modest holdings

of physical assets — one operating as an ESOP and the other

as a worker cooperative — are profiled in Rural Cooperatives

magazine, July/August 2007, pages 28-31 (past issues are online at: www.rurdev.usda.gov/rbs/pub/openmag.htm). 

Employee-owned companies are also represented in

industries with relatively complex manufacturing. Doucette

Industries, Inc. is one example. It produces a range of

standard and specialized heat exchangers for refrigeration and

air conditioning applications. It was owned by one family

until a program of employee stock purchase was started in

1993. In 2003, a complete ownership transfer to employees

was made as an ESOP company. 

Headquartered in York, Pa., Doucette Industries has added

a production location in Clearwater, Fla. It has 40 employees

with annual sales that average between $6 million and $7

million. It provides customized heat exchanger development

to meet very specific customer needs. In fact, Doucette serves

customers throughout the world. Its website provides details

on its capabilities and services (www.doucetteindustries.com).

Employee ownership in stages

Doucette Industries began succession planning in 1993

when it started a program for employee stock ownership. At

that time, a father and two sons were sole owners. When it

incorporated, company stock was divided into two classes,

with voting shares of about 25 percent and 75 percent as

non-voting stock. 

The father held slightly more than 50 percent of the

voting shares. As part of their compensation, in 1993

employees began to annually receive shares of non-voting

stock. 

By 2003, most of the non-voting stock, or about $2.25

million worth, had been transferred to employees. To

complete the ownership conversion to a 100-percent ESOP,

$750,000 in voting shares and an additional $ 250,000 in

non-voting stock needed to be purchased. Two separate bank

loans to Doucette Industries were necessary to transfer that

amount of stock. But banks usually require some type of

personal guarantee on loans for the purchase of equity. 

The USDA Rural Development office in Pennsylvania was

contacted by Doucette Industries about financing the

ownership transfer to avoid personal guarantees. After

examining the company’s financial condition and its earnings

prospects for the future, USDA approved the B&I loan

guarantee for the larger loan. 

A bridge to new generations of ownership

The employees of Doucette Industries today have more

control over their economic destiny because they have a voice

in such decisions as job reductions or plant closure, as well as

in more positive directions such as hiring and business

expansion. Creating an ESOP at Doucette Industries was not

only good for employees, but also made it feasible for the

owners to defer taxes on capital gains from the sale of their

business. 

The transition of family-owned businesses to non-family

members is often a far more financially difficult process than

is the sale of firms with publicly traded stock. Rural

communities also have fewer buyers for their businesses than

those located in urban areas. In turn, a closure of a business

in rural areas often results in population losses as

unemployed workers may need to seek jobs elsewhere. 

The Rural Development B&I loan guarantee program has

potential to be an effective “bridge” for making it possible for

workers to keep many family-founded businesses in operation

for the future. ■
Rural Cooperatives / January/February 2009 13

Utility Co-op Connection

Need for new baseload capacity, expanded

transmission are huge challenges for RECs 

By Anne Mayberry, 

Rural Utilities Programs 

USDA Rural Development

ural electric

cooperative utilities

will need to double

generating capacity by

2020 due to current

and projected growth, according to a

recent report issued by USDA Rural

Development’s Utilities Programs. The

report, Rural Electric Power Generation

and Capacity Expansion, notes that

because of the significant lead time

needed to add baseload capacity, many

cooperatives are already behind the

curve. 

Baseload is electricity generated 24

hours a day, seven days a week and

fueled by coal, nuclear energy and,

sometimes, natural gas.

In addition to the need to add

generation, the report sees lack of

transmission capacity as another cause

for concern. This is a key constraint in

development of renewable energy

resources in rural areas because the

transmission grid, which delivers energy

from points of generation to demand

centers, is operating at capacity.

Peak demand climbing 

Peak demand for electric power is

expected to increase by more than

135,000 megawatts (MW), or 17.7

percent during the next 10 years.

Capacity is projected to increase by

only 77,000 MW, the report predicts. 

Rural electric generation and

transmission (G&T) cooperatives

generate approximately 5 percent of the

nation’s electric power. Recent surveys

conducted by the National Rural

Electric Cooperative Association

indicate that a 10-year capital

requirement of $65.5 billion is needed

to meet planned capacity. This includes

$49.9 billion for new generation, $10

billion for transmission and $3 billion

for environmental requirements. 

A number of factors have affected

the ability of electric utilities to plan for

future growth. These include: rising

construction costs, legal challenges to

environmental permits, uncertainty

relating to carbon dioxide emission

limits and the inability of USDA Rural

Development’s electric program to fund

baseload projects.

Noting that a balanced approach is

necessary to maintain system reliability,

sustain economic growth and allow time

for development of new technologies,

the USDA report says that a mix of

strategies must be developed. The

report’s findings have been echoed by

those of other industry organizations. 

The Edison Electric Institute, a

trade association representing for-profit

electric utilities, released its own report

in November. EEI notes that “all types

continued on page 41
14 January/February 2009 / Rural Cooperatives

Value-Added Corner

Family Farmers Seed Cooperative: Colorado co-op

aims to meet growing need for organic seed

Organic chili peppers to be used for seedstock. Facing page: Rich Pecoraro, of Abbondanza Organic Seeds and Produce, and

Frank Stonaker, director of Colorado State University’s specialty crops program, check on organic seedstock. Photos courtesy

Family Farmer Seed Co-op

Editor’s note: Value-Added Corner is

compiled by Anne Todd. Contact her at:

anne.todd@wdc.usda.gov. 

amily Farmers Seed

Cooperative was

incorporated in March

2008. Based in

Colorado Springs,

Colo., the co-op currently has four

members: two farms in Colorado and

one each in Washington and Oregon.

According to Dan Hobbs, executive

director of the Organic Seed Alliance

(which provides technical assistance to

Family Farmers Seed), the co-op plans

to use a $120,000 Value-Added

Producer Grant it received from USDA

Rural Development to expand its

membership.

Business objective

The Organic Trade Association

reports that U.S. sales of organic food

and beverages have grown from 

$1 billion in 1990 to an estimated 

$20 billion in 2007. Organic food and

beverage sales are projected to reach

about $23.6 billion in 2008. In 2006,

organic products represented approximately 2.8 percent of overall annual

food and beverage sales. Organics are

one of the fastest-growing sectors of the

food and beverage market, growing

almost 21 percent during 2006 alone. 

However, the organic seed supply

needed to grow vegetables and other

crops is in short supply. Family Farmers

Seed Cooperative’s goal is to help meet

the demand for quality, certified-organic

seed. The co-op says it “wants to

increase the quantity and diversity of all
Rural Cooperatives / January/February 2009 15

types of organic seeds.”

USDA Value-Added Producer Grant

Funding:

The $120,000 grant from USDA will

be used to develop a premium national

market for specialty organic seeds to

launch Family Farmers Seed Cooperative as a 100-percent producerowned business, and to help expand

mem-bership. The USDA grant is a

matching grant, so the co-op has also

received $120,000 in funds from other

backers, including Colorado State

University. 

Importance of USDA backing

“Dozens of large and small firms

have begun to offer organic varieties,

and we are beginning to see the

economic potential of the market, but

are constrained by limits within the

production system,” says Hobbs.

“Consequently, certified-organic

produce farmers often have to revert to

the use of conventional seeds.” [Under

USDA’s National Organic Program,

when organic seeds are not commercially available, farmers may use

untreated, non-synthetic seeds and

planting stock provided that other

specific federal and local program

conditions are met.] “This represents a

significant and time-sensitive market

opportunity for organized seed producer

groups,” Hobbs continues. “This

funding provided by USDA Rural

Development will be a great asset in the

cooperative’s endeavors.” 

Major challenge

facing the co-op

According to co-op member Richard

Pecoraro, co-owner of Longmont’s

Abbondanza Organic Seeds and

Produce, the co-op is also promoting

equipment sharing. Seed-cleaning

equipment is very expensive and,

therefore, it is difficult for small-scale

producers to afford. Pecoraro and other

co-op members will gain access to the

needed equipment, which in turn will

help increase their production of

organic seeds. 

Major opportunity

For the organic food market to

continue its growth trends, more

supplies of organic seed are needed.

This new cooperative has the potential

to help meet this need. The grant will

help Family Farmers Seed Cooperative

members improve their financial returns

and will create job opportunities for

agricultural producers, businesses and

families.

Contact

For more information about Family

Farmers Seed Cooperative or the

organic seed industry outlook, contact:

Daniel Hobbs, 20 Boulder Crescent,

Suite 100, Colorado Springs, CO

80903; Phone: (719) 250-9835.
16 January/February 2009 / Rural Cooperatives

By Harry Cline 

hcline@farmpress.com

Editor’s note: this article is reprinted courtesy the

Western Farm Press.

alcot is alive and financially sound.

However, the Bakersfield, Calif.-based,

once-mighty cotton marketing cooperative is

down to just one California cotton warehouse

in operation and, for the first time in decades,

is shedding its corporate wings.

It’s not just Calcot. The total U.S. cotton industry is

struggling, and it was made painfully and locally evident in

the reports of the chairman and president of Calcot at the

cooperative’s quartet of annual meetings in Bakersfield;

Glendale, Ariz.; and El Paso and Robstown, Texas.

At its peak, Calcot marketed 2.2 million bales of cotton, all

from the San Joaquin Valley and Arizona. For the 2007-2008

crop, Calcot took delivery of a little less than 800,000 bales,

and 55 percent of that came from Calcot’s recent takeover of

Southwest Irrigated Growers (SWIG) cotton in far west

Texas and New Mexico, and the cooperative’s foray into

south Texas four years ago, where it continues to pick up

acreage — 30,000 acres in the past year.

The cotton free-fall in California is not over yet,

according to Kern County, Calif., cotton producer and

Calcot Board Chairman Charles Fanucchi and cooperative

President Bob Norris, who predicted San Joaquin Valley

(SJV) acreage could fall to just 150,000 acres next year. At

most, he said, it could reach 250,000 acres, which is still less

than the 257,000 this season, the lowest SJV cotton acreage

since 1934.

Norris said after the Bakersfield meeting that SJV upland

acreage likely will not exceed 50,000 acres in 2009. The rest

will be Pima, but how much will depend on the extra-long

staple price and water availability.

Fanucchi said the three looming, critical issues facing

California agriculture for 2009 are “water, water, water.”

Cotton must compete with a cornucopia of other crops for a

limited water supply as a result of a two-year drought and

judicial rulings giving fish (rather than people and production

of food and fiber) first rights to federal and state surface

water supplies. The most recent prices for cotton have put it

at or near the bottom of cropping option lists.

Fanucchi also announced the cooperative once again has

punched a hole in its corporate belt to tighten per bale

marketing costs. He said:

• Calcot continues to reduce its labor force and has frozen

wages, which are 20 percent lower than last year. Some

Calcot executives have voluntarily reduced their salaries.

• Calcot will close its Hanford warehouse when the 2007-

2008 crop is sold out, leaving Bakersfield as its only

warehouse location.

• Calcot has restructured its board, creating a 16-member

executive committee to meet regularly to oversee the

cooperative’s business. The full 45-member board will now

meet only three times per year rather than eight, as a costcutting measure. Board meetings may even shift to Phoenix

and other more central locations, given that the

cooperative’s marketing area now stretches about 1,500

miles, from the northern San Joaquin Valley to south Texas.

• The cooperative’s retains/revolving fund is being stretched

from five to seven years to provide more stable footing to

survive these hard times.

• The Calcot corporate aircraft was to be gone by midDecember. Fanucchi said it will be returned to GE credit.

“Times are as tough as I’ve seen in my lifetime,” said

Norris, who has logged more than four decades in the

Western cotton business, all with Calcot. 

Calcot surviving in a 

floundering cotton industry
Rural Cooperatives / January/February 2009 17

Calcot normally announces its final pool payments at late

September annual meetings. Not this year. There were only

meager progress payments. There is 2007 crop left to sell,

and Norris said the pool likely will stay open to the end of

the year.

Calcot is not alone. Half the U.S. crop is still not

committed to a mill buyer. “This was not a season I want to

repeat,” Norris said, detailing a litany of train wrecks that

characterized 2007-2008. This included steadily increasing

U.S. production, coupled with falling exports during the

season; failure once again for China to import what was

projected; increasing production from India to fill markets

normally served by U.S. cotton; a worldwide credit crunch

and sluggish U.S. economy, resulting in slower sales.

The nail in the coffin came in February 2008, when

supply-demand fundamentals suggested lower prices on

cotton; however, prices skyrocketed. Norris did not take time

to explain the complicated reasons why, but others have

indicated it was due to index fund trading in commodities.

This upside-down fundamentals picture “brought sales and

even inquiries to a halt,” he says.

Margin calls drained cash from merchants and co-ops

alike. One long-time merchant went out of business,

according to Norris.

Calcot met its margin calls, but it tied up capital and

halted progress payments.

Considering one disaster after another, Norris said it was

an “accomplishment” for Calcot to weather the storms.

Norris told growers this marketing season there will be

fewer bales to sell once again.

“I see our industry in California continuing to shrink,” he

said.

It is that way across the entire the U.S. Cotton Belt, where

plantings totaled only 9.4 million acres compared to 15.3

million just two years ago.

“It is clear our industry is undergoing some very painful

changes,” says Norris.

Ever the optimist, Norris said the reduction in U.S. cotton

supplies “can only help us work off very large stocks.” It

could reduce stocks from the 9.9 million bales going into this

season to going out of 2008-2009 with just under 5 million

bales, assuming USDA is right in its estimate of 14.5 million

bales of exported U.S. cotton.

World cotton consumption continues to grow. There is a

12-million bale gap between world production and

consumption.

Weather in China, India and Pakistan has

not been ideal, according to Norris. Those

countries combined consume about 83 million

bales, but produce 69 million bales. This

should present good opportunities for U.S.

sellers, noted Norris.

SJV Pima acreage is also down sharply this

season, but prices are still below what growers

want this year and next. High prices are

floating around, but no one is doing business at those prices,

according to Norris.

“If growers can get a bio-engineered Pima variety, I do see

Pima as having a future in the San Joaquin Valley,” said

Norris. There are genetic Pima varieties, but the problem is

that they have not been approved in the international

marketplace.

As for SJV upland, Norris says seed contracts may keep

upland in the Valley.

Despite its cutbacks and plummeting acreage, Calcot is

not in financial trouble, espouses Norris, adding that the

cooperative has added 90,000 new acres in the past two years.

Most of this has been from SWIG and South Texas.

Nevertheless, the U.S. cotton crisis is not over, according

to Norris, who expects the economy to remain fragile into

next year, “but I do think cotton prices will improve. I think

we’ll come through this current economic crisis and things

will improve,” he says. ■

Calcot Chairman Charles Fanucchi says the three looming,

critical issues facing California agriculture for 2009 are:

“water, water, water.”
18 January/February 2009 / Rural Cooperatives

By Carolyn Liebrand, carolyn.liebrand@wdc.usda.gov

K. Charles Ling, charles.ling@wdc.usda.gov

Editor’s note: This article is based on Research Report 217, “Cooperative Approaches for Implementation

of Dairy Manure Digesters,” published by USDA Rural Development. This is the second of two articles

relating to the use of anaerobic digestion of cow manure to produce renewable energy and other benefits. See

“Carbon Credits for Farmers,” page 10 of the November-December 2008 issue. (Back issues are online at:

www.rurdev.usda.gov/rbs /pub/openmag.htm, or e-mail: dan.campbell@wdc.usda.gov to request a hard

copy.) 

airy operations across the nation routinely handle about 500 billion pounds of cow manure each

year by collecting, storing and spreading it over the land. In large manure-storage structures, such

as lagoons, little oxygen can dissolve into the mix, creating anaerobic (in the absence of oxygen)

conditions. Certain microbes found naturally in manure feed on undigested materials in the

manure and, as part of the digestion process, give off gas that contains 60 to 70 percent methane. 

In recent years, several factors have converged to spark fresh interest among dairy farmers and

others in anaerobic digestion systems. Economies of size in milk production have lead to an

increase in the number of cows on the average dairy operation. This increased concentration of

Co-ops can play role in turning 

dairy waste into energy and byproducts

Photos courtesy University of Vermont Extension Service
Rural Cooperatives / January/February 2009 19

cows has raised concern over environmental issues

surrounding manure management. 

At the same time, sharp increases in energy costs, along

with concern over energy supplies, have spurred interest in

renewable sources of energy. The current desire to reduce

levels of carbon dioxide, methane and other so-called

greenhouse gasses (gasses thought to cause an increase in the

Earth’s temperature) have also led federal, state and local

governments to encourage farmer use of anaerobic

technology.

Anaerobic digestion of manure

An anaerobic digester system provides a favorable

environment (absence of oxygen, optimal temperature) for

methane-producing bacteria to thrive and a means of

capturing and collecting the biogas produced by the microbes

as they digest (or decompose) the manure. 

The biogas captured from the digester can be used for fuel

in any equipment that normally uses propane or natural gas.

These include boilers, heaters, chillers, internal combustion

engines or gas turbines used for generating electricity. In

addition, heat energy produced by these stationary engines

running on biogas can also be captured and put to useful

purposes. In some applications, it may be beneficial to the

equipment to remove the hydrogen sulfide present in biogas

(i.e., “clean” the gas) prior to use.

Alternatively, the biogas may be cleaned and conditioned

(water and carbon dioxide removed and gas compressed) for

sale to a commercial gas pipeline. Cleaned and compressed

gas can be used in mobile engines configured to run on

natural gas or similar fuel.

Furthermore, the methane in biogas captured from

anaerobic digestion of dairy cow manure may be qualified to

receive carbon credit if it is flared (burned off) or otherwise

prevented from emitting into the atmosphere. The global

warming potential of methane is equivalent to at least 21

times that of carbon dioxide. This means that preventing one

unit of methane gas emission has the effect of reducing the

amount of greenhouse gas emission equivalent to a reduction

of 21 units of carbon dioxide.

The manure effluent leaving a digester, while not

significantly reduced in volume, is biologically stabilized

(meaning it is fully decomposed and the compounds

contributing to manure’s unpleasant odors are

eliminated).The solids in the manure effluent can be

separated, perhaps composted, and used in applications such

as bedding for cattle, a soil amendment, or as a gardening

product, such as potting soil. The remaining liquid effluent

can be used to fertilize fields and crops, or even further

fractionated into manure concentrate and “treated” water for

discharge.

Economic impact on dairy farming

The net economic impact of installing an anaerobic

digester on a dairy operation depends on the dairy’s ability to

use the biogas, digested solids and liquid effluent. 

Utilization of the end products of manure digestion can

lower the dairy operation’s operating costs, add income from

sales or provide a combination of avoided expenses and

increased revenue. Some notable benefits of anaerobic

digestion, such as the reduction of offensive odors and

improved ease of manure management, are not easily

quantifiable in terms of dollars and cents. 

At the same time, capturing the benefits of anaerobic

digestion will require additional expenses, such as purchase,

operation and maintenance of equipment to use the biogas

and to prepare the byproducts for use or sale, as well as

increased management time and skill. The benefits and costs

associated with anaerobic digestion of dairy cow manure that

have been observed or predicted are identified in the table on

page 20. 

Whether the cost of an anaerobic digester is sufficiently

offset by its benefits — both tangible and intangible —

depends upon each dairy’s situation.

Obstacles

Lessons learned from previous efforts in producing biogas

from manure resulted in improved design, operation,

equipment and cost-effectiveness of anaerobic digestion

systems. However, only 95 anaerobic digester projects that

use dairy manure were identified by the U.S. Environmental

Protection Agency in 2007. 

While anaerobic digesters may not be appropriate for

every dairy farm, these 95 projects represent a very small

fraction of the nation’s 59,000 licensed dairy herds.

The set of barriers to adoption are often unique to each

producer’s situation. The challenges reported by dairy

producers using (or attempting to use) anaerobic digesters in

their operations have included: 

• Low rates paid by utilities for electricity generated by

biogas-fueled generators;

• Difficulties connecting to the power grid;

• Difficulties adapting the anaerobic digester to a farm’s

existing manure system;

• Limited number of anaerobic digester system providers; 

• Lack of information about anaerobic digesters;

• Added demand on a dairy farmer’s time and new skills

needed to manage the digester;

• Lack of ability to capture value from use or sale of

byproducts; 

• Difficulties in obtaining financing and/or funding for high

digester capital costs.

A role for cooperatives?

A cooperative approach may be one way for dairy farmers

to overcome obstacles to the successful use of anaerobic

digesters. Dairy producers could take one of two basic

approaches: 1) an existing dairy cooperative could provide

services related to the adoption of anaerobic digester

technology as a part of its member services, or 2) a group of
similarly situated dairy farmers could form a separate entity

to address their specific needs. 

The group effort may be more effective and efficient than

each farmer facing the challenges of adopting anaerobic

digester technology alone. Collective effort may enhance the

economic feasibility of anaerobic digesters by lowering the

installation and operating costs, increasing returns from

energy and byproduct sales — or both — while allowing milk

producers to remain focused on milk production. 

Cooperation could be effective in several areas, such as:

Negotiation — A cooperative may engage (either by

employment or by contract) experts to negotiate rates and

terms of trade with utilities, digester suppliers, firms that

wish to dispose their organic waste into the digester, and so

forth. A group of dairy producers would have more market

power to command favorable terms, or gain higher quality

expertise at lower cost to address their specific needs, than

they would if acting as individuals. 

Services — A cooperative could hire or contract with

technical experts to provide information, leads, analysis and

expertise. This would allow members to avoid the full cost of

finding and vetting such expertise. Services might include: 

By Product Benefits Costs

Electricity ■ Avoided electricity purchases ■ Electricity production equipment

■ Electricity sales ■ Operating and maintenance

■ Required upgrades to electrical system

■ Sales negotiation, legal fees 

Biomethane ■ Natural gas sales ■ Biogas collection

■ Gas cleaning

■ Storage/ transportation

Heat ■ Heat/hot water ■ Equipment, operating and maintenance

Digested solids ■ Avoided bedding purchases ■ Equipment, operating and maintenance 

■ Sales of separated solids ■ Sales negotiation and/or marketing

Carbon Credits ■ Sales ■ Aggregation fee

■ Trading fee

■ Verification costs

Fertilizer ■ Lower energy use in handling effluent

■ Avoided purchases

■ Flexibility in timing for land application

■ Improved nutrient quality

■ Lower herbicide use

■ Sales ■ Sales negotiation and/or marketing

Environment ■ Reduced odor

■ Reduced water contamination risk

■ Avoided lawsuits

■ Pathogen reduction

■ Methane destruction/capture

■ ■ Substrate (organic wastes) management and

negotiation

20 January/February 2009 / Rural Cooperatives

Possible benefits and associated costs from byproducts of anaerobic digestion of dairy manure

Tipping fees — fees that firms may pay to

dispose of their organic waste in a farmer’s

digester, which also may boost the digester

biogas output.
• Technical assistance in setting up and operating a digester

and trouble-shooting problems so a producer does not have

to “reinvent the wheel” to implement the technology.

• Digester management services, where a cooperative

manages the members’ anaerobic digesters and biogas

utilization operations, leaving the farm operators free to

focus on milk production.

• Back-up equipment: cooperatively owned biogas-utilization

equipment that can be maintained and made available to

members when their equipment is down for repairs or

maintenance.

• Manure hauling service: if there is a centralized digester, a

cooperative could provide manure and effluent shipping

coordination and services (including attention to

biosecurity issues related to manure transfer), relieving the

members of the management burden. Members could share

the cost of equipment for shipping manure to the central

location.

• Financing information and/or grant management: a

cooperative could provide grant management for its

members, or, at minimum, provide information to both

producers and bankers. A large existing cooperative may

even be able to provide loans with favorable terms to

producers wishing to install a digester. 

Marketing — A cooperative could assist members in

marketing products derived from anaerobic digestion (biogasfueled electricity, digested solids, liquid effluent fertilizer,

natural gas and carbon credits). A cooperative could also

research potential uses for digested solids and liquid effluent,

develop standardized marketing materials and product

guidelines, or assist utilities in developing and marketing

“green energy” resulting from anaerobic digestion. 

A group marketing effort would represent a larger volume

than an individual dairy, which may increase marketing

efficiencies and effectiveness, or even open up new marketing

channels. Possibly, a cooperative could operate a common byproduct packaging and distribution venture for members

located in close proximity. 

Centralized Systems: Under certain circumstances, a

group of closely located small- and medium-size dairy

producers may be able to more effectively operate a common

digester fed by member-farms’ manure than if each member

installs a digester on their own operation. The advantages of

a centralized digester are that risk, capital costs, digester

operating and maintenance responsibilities, as well as

byproduct marketing, would be borne by the cooperative.

However, transporting manure to a central location

introduces the potential for pathogens to be transferred

between farms. 

Alternatively, producers in close proximity to a natural gas

pipeline may be able to truck or pipe the biogas generated on

their operations to a central gas clean-up and conditioning

plant located at the pipeline insertion point. They could

cooperatively own and operate the gas cleanup plant and

perhaps even the transportation infrastructure for getting the

biogas to the plant. 

The cooperative effort could be narrowly focused on one

obstacle or one opportunity, or incorporate multiple

functions. Alternatively, a cooperative could focus on one

effort initially and gradually take on more functions as it

builds on its successes. 

Funding a cooperative

One way that a cooperative effort could be funded would

be to charge a per-cow fee based on the number of milk cows

on each member’s operation. Alternatively, a cooperative

could mark up prices and fees for its products and services to

cover its cost of providing them. The farmers using the

service or benefit should be the ones funding its availability. 

As with the anaerobic digester technology itself, dairy

producers will have to evaluate whether the benefits of acting

together to address their needs in using a digester outweigh

the costs. 

The value of a cooperative effort depends upon its

effectiveness in enabling members to increase net returns to

anaerobic digestion. The sidebar (above) identifies five key

areas where a cooperative effort may assist producers in

capturing benefits from anaerobic digestion at lower cost. ■

Rural Cooperatives / January/February 2009 21

Possible benefits of a cooperative effort

to support the adoption of anaerobic

digesters by dairy producers

Energy ■ Improved compensation for electricity

produced

■ Favorable terms for connecting to the

electrical grid

■ Natural gas marketing

Byproducts ■ Technical guidance on utilizing

digested solids and effluent on farm

■ Marketing research & development for

byproduct sales 

System design ■ Technical guidance for

design/installation

■ Negotiated prices for digester

components/installation

■ Provider screening

Management ■ Technical guidance to boost biogas

production

■ Management assistance to reduce

operating costs

Carbon Credits ■ Aggregation and trading

■ Reduced fees
By David Chesnick, Anthony

Crooks, Alan Borst and Robin

Robinson

Editor’s note: Chesnick, Crooks and Borst

are ag economists with USDA Rural

Development; Robinson is special assistant

to the administrator of Rural BusinessCooperative Programs. 

merging cellulosic

ethanol production

technologies may hold

great potential to

expand the economic

assets owned by rural Americans.

Cellulosic ethanol requires biomass

that may be produced in most rural

areas. But will rural Americans be

significant equity participants in the

cellulosic future? What methods of

financing will encourage rural

participation? 

The United States government is

committed to increasing America’s

domestic supply of energy and to

improving energy efficiency, as

indicated by the following: 

• The Advanced Energy Initiative was

launched in 2006 to help “break

America’s dependence on foreign

sources of energy.” It included a

national goal of replacing more than

75 percent of the nation’s oil imports

from the Middle East by 2025 by

making greater use of “homegrown”

renewable fuels with advanced

technologies to make fuel ethanol

from cellulosic biomass. 

• The Energy Independence and

Security Act of 2007 was aimed to

help reduce America’s dependence

on oil by increasing the supply of

alternative fuel sources. This is

facilitated by setting a mandatory

Renewable Fuel Standard (RFS),

requiring fuel producers to use at

least 36 billion gallons of biofuel in

2022, and reducing U.S. demand for

oil by setting a national fuel

economy standard of 35 miles per

22 January/February 2009 / Rural Cooperatives

Cellulosic ethanol opportunities

for co-ops and rural ownership 

“Once again, the partnership with American agriculture has proven its

worth during this difficult time. As we have seen in the past, the plants that

have a strong connection with farmers seem to be better able to withstand

unpredictable market fluctuations. The fact is, agriculture remains the

backbone of the ethanol industry. It’s puzzling that many believe secondgeneration ethanol will be largely built by big businesses, not farmers. If

history is any predictor of the future, not having the direct involvement of
Rural Cooperatives / January/February 2009 23

gallon by 2020 — which will increase

fuel economy standards by 40 percent. 

• The Food Conservation and Energy

Act of 2008 (Farm Bill) allocates

$1 billion to fund programs that

augment renewable energy

investments in technologies, new

feedstocks and facilities. It includes:

— Continuation of the Biomass

Research and Development

Program, with mandatory funding

of $118 million. This collaborative

effort between USDA and the U.S.

Department of Energy coordinates

research and development to

improve feedstock and biofuel

production efficiencies.

— The Biorefinery Assistance

Program provides $320 million in

mandatory funding for loan

guarantees to produce biofuels.

Guarantees may cover 90 percent

of a loan (these loans can be for up

to 80 percent of project cost, or a

maximum of $250 million).

— The Rural Energy for America

Program provides $250 million in

grants and loan guarantees to

farmers and rural businesses for

investing in renewable energy

systems and energy efficiency.

USDA is directed to fund and

support expanding production of

advanced biofuels under the

Bioenergy Program, with

mandatory funding of $300 million.

Incentives are paid on increased

production of biofuels developed

from farm and forestry crops and

waste materials.

A national mission to produce

cellulosic ethanol on a commercial

scale provides rural America with

significant opportunities, as well as

formidable challenges. Support for

cellulosic ethanol is strong, and rural

communities across the nation are

especially capable of producing a wide

variety of raw materials and other

requirements for cellulosic ethanol. 

agriculture may be a fatally flawed path forward.

“Farmers need to be involved in building the next generation of ethanol

plants. We should still be forming farmer-owned cooperatives. Time and time

again, we have seen that these boards can provide the kind of intelligent and

careful guidance that is needed to make plants successful during a wide variety

of market conditions.”

— Mike Bryan, Ethanol Producer Magazine January 2009

These fuel pellets are created from biomass at the Show

Me Energy Cooperative in Missouri. Photo courtesy Show

Me Energy
24 January/February 2009 / Rural Cooperatives

At the same time, however, rural

individuals and communities face

substantial barriers to local ownership.

Costs for these plants are very high,

financing can be complex and there is a

general lack of access to information

and technologies. 

Whether a sufficient number of rural

Americans will acquire equity positions

in businesses that will help sustain their

communities, or whether their

participation in value-added businesses

remains limited, is a question critical to

the future of rural America. How can

rural residents move beyond servicing

and/or working in ethanol plants

toward leveraging of their resources

into ownership stakes in cellulosic

projects?

USDA study gauges

rural opportunities 

USDA Rural Development

commissioned a team to analyze an

array of business structures, programs

and strategies appropriate to the

resources of rural residents for

financing cellulosic ethanol projects. 

The study examines the cellulosic

ethanol production from a technical,

operational, geographical and financial

standpoint, with the following

objectives:

• To develop equity financing and

securitization models appropriate for

cellulosic ethanol projects and rural

investors.

• To facilitate local investment in

renewable energy projects and

retention of returns from these

investments within rural communities.

• To expand ownership opportunities.

• To encourage use of alternative

approaches for collateralizing loans,

unlocking under-utilized equity in

rural areas.

• To map and monitor potential rural

production activity, then compare it

with likely rural investment resources

under various financing models.

• To design the outlines of a program

that could best support the equity

financing of cellulosic ethanol

production in rural communities, with

graduated levels of government

financial involvement.

The technology for cellulosic

ethanol may be better suited for the

expansion and diffusion of local

ownership than corn ethanol. Production may be smaller scale, suitable to

a wide variety of crop feedstocks and,

therefore, all regions of the nation.

While the technology is evolving,

progress suggests imminent gains in

production and cost efficiencies.

The investment capacity of rural

residents is substantial and relatively

untapped. Local investors often tend to

bring patient capital (investments with a

longer payback timeframe) to the table

— the type of funding typically

required by emerging technologies or

market development, such as cellulosic

ethanol. They often view such

investment not only as an avenue to

increase personal wealth but as a way of

supporting their communities. 

Given the narrow range of industries

in rural America, cellulosic ethanol

production has the potential to

revitalize rural communities. Adding a

new business, such as ethanol

production, to the existing local

business market can bring new vitality

to rural communities by attracting new

residents seeking employment and

former residents ( who moved to find

jobs) to return. 

Ethanol production offers higher

paying jobs, the type more often found

in metro areas, such as accounting,

engineering, administrative/management and marketing. As a result, the

demand for infrastructure needs, such

as transportation and utilities, will

increase. This in turn fosters growth of

non-farm and non-ethanol businesses

by providing direct input to these

businesses and attracting labor. 

Farmer co-op role in

cellulosic ethanol 

Farmer-owners of a cooperative can

participate in the profits of an ethanol

plant through dividend payments. The

distribution of payments represents

additional income to the individual

farmer-owners and their families.

Further, these dollars turn over many

times in a local community or region.

With absentee ownership, most

dividends instead flow back to the

corporate headquarters.

Some farmer cooperatives have

already begun to invest in this sector. In

November 2007, Central Minnesota

Ethanol Partners — a joint venture

between Central Minnesota Ethanol

Co-op, SunOpta, and Bell Independent

Power Corp. — signed a letter of intent

for an engineering study and feasibility

analysis to construct, own and operate a

10-million-gallon per year cellulosic

ethanol plant. Initial plans call for the

plant to be co-located with Central

Minnesota Ethanol Co-op’s existing

21.5-million-gallon ethanol plant in

Little Falls, Minn. Each party owns

one-third of the project. 

The first feasibility study took

approximately six months and examined

fiber supply, fiber cost and availability,

permitting issues, capital costs and

variable costs. 

The proposed plant would use

locally obtained wood chips and

combine SunOpta’s conversion

technology with Central Minnesota

Ethanol Co-op’s existing infrastructure,

raw materials supply sources and

operating experience. The objective of

the second phase is to reduce capital

and variable costs by 10 to 15 percent,

as well as to get all permits in place. 

In November 2008, Central

Minnesota Cellulosic Ethanol Partners

was awarded a Next Generation Energy

grant of $910,000 from the state of

Minnesota.

In Centerview, Mo., 220 area farmers

have invested in the Show Me Energy

Cooperative. Their $7 million facility

has been operating since 2007. Their

co-op collects and sorts plant waste

from locally grown crops, which is then

ground and pressurized into pellets.

These cellulose pellets are then

marketed as an alternative to natural gas

and propane. 

Show Me Energy is a major fuel

supplier for local energy generation and

home heating. Its cellulose could

potentially be used as inputs for ethanol

production, which have been part of the
cooperative’s plans from the beginning.

Longer payback period likely

At this stage of evolution of

cellulosic ethanol, there is a need for

patient capital and an acceptance of

lower return on investment. Ethanol

can be viewed as a maturing market that

no longer offers the high returns seen

in the recent past. Although cellulose is

a new source for ethanol production,

the end product is the same as cornbased ethanol. 

Therefore, those willing to invest in

cellulosic ethanol will have to be willing

to accept a lower rate of return early in

the project. Cellulosic ethanol requires

significant early-stage investment

because it is a new method for

producing ethanol with limited

technology available for production.

Additionally, there are no standardized

cellulosic ethanol plant designs and few

experienced managers. Longer time

frames and intensive oversight are

needed to develop a successful

production company. 

Patient capital will be needed to

assist the cellulosic ethanol producer

with developing and getting cellulosic

ethanol ready for commercial

production. 

The payoff should come later, when

production ramps up. The feedstock for

these new cellulosic production facilities

will be cheaper than for corn-based

facilities, thus providing a higher return

than in the early stage of production.

Advantages for rural investors

There are three major advantages for

rural investors who participate in

cellulosic ethanol production: 1)

portfolio diversification; 2) dividend

payments; 3) community revitalization. 

A diversified portfolio is important

to all investors because it minimizes risk

exposure. If a cellulosic investment

opportunity includes dividend

payments, the payments will provide

additional income to the rural investor.

The additional income will be turned

over in the local community and region,

which should help revitalize a

community. Additional demand for new

product and services can lead to new

investment opportunities and further

community revitalization efforts. 

Regions are unevenly endowed with

resources, but virtually all have

sufficient investment potential. Lowresource communities that are locked

out of the current ethanol market may

be able to take advantage of programs,

subsidies and supply chain opportunities

for cellulosic ethanol production.

Farmers and landowners control much

of the equity in rural America, but nonfarm rural residents account for a

significant and increasing amount of

potential rural investment. Investment

models therefore may need to combine

both farmer and local non-farm

investors. 

The U.S. Census in 2006 indicated

there is a potential of more than

$25 billion available for investing,

based on non-metro income.

Therefore, communities should be able

to take advantage when the

environmental requirements of

cellulosic ethanol production become

more exacting. Communities meeting

the requirements should be wellpositioned for project investment and

participation.

The economics of cellulosic ethanol

production encourage local

participation in equity financing. The

opportunity for ownership in some

cases may be stronger for other parts of

the supply chain than for the cellulosic

ethanol production facility. Information

about exact production costs is scarce,

but is expected to develop as various

pilot demonstration facilities get

underway.

There are several promising

opportunities for increasing rural equity

ownership of cellulosic ethanol. These

opportunities employ a government

debentures program, clean renewable

energy bonds, flip models, lease

structures, a renewable energy fund, tax

credit models and custom harvesting

(see sidebar).

The new financing mechanisms offer

alternative strategies to increase rural

equity in the cellulosic ethanol

economy and provide rural investors

and rural communities with opportunities to pool equity resources to

either obtain an ownership position or

participate in feedstock logistics. It is

hoped that ultimately these new

mechanisms will help to stimulate the

local economy and diversify rural

investment opportunities. ■

Rural Cooperatives / January/February 2009 25

Construction work at Missouri’s Show Me Energy Cooperative in 2007. The co-op is owned

by 220 area farmers. Photo courtesy Show Me Energy
26 January/February 2009 / Rural Cooperatives

New approaches to rural ownership aim to address

the limitations of the traditional methods of equity

financing. The five mechanisms listed here offer greater

flexibility to potential investors. Moreover, they are more

adaptable to alternative strategies for ownership,

including minority positions in production, or equity in

ancillary industries along the supply and marketing

chains. 

Rural Business

Investment Program

Congress established the Rural Business Investment

Program (RBIP) in the 2002 Farm Bill to promote

economic development and generate income and job

opportunities in rural regions by encouraging venture

capital investments in smaller enterprises and by meeting

the equity capital needs of such businesses. RBIP is

funded through USDA’s Commodity Credit Corporation. 

The program licenses Rural Business Investment

Companies (RBIC) through a competitive process. It

allows for a 3-to-1 leverage of private capital through the

use of federally guaranteed discounted debentures. 

For every dollar of private capital raised by a licensed

RBIC, the RBIC can leverage three borrowed dollars,

which USDA guarantees. The debentures are discounted

because five years of interest is deducted on a pre-paid

basis, enabling the net proceeds to be invested as equity

(because there is no need to generate current income to

service interest payments).

Flip Model

The ownership flip structure was originally developed

in Minnesota to help an individual farmer to finance a

utility-scale wind turbine. Such projects require a large

amount of investment capital, but the average rural

landowner lacks a sufficient tax liability to fully capture

the related federal tax benefits, including both the

Production Tax Credit (PTC) and accelerated

depreciation. It is thus unlikely that most individuals

could develop such a project on their own. 

Passive loss restrictions and at-risk rules further

contribute to the difficulty in individuals fully capturing

the full value of these tax benefits. Some farmers have

overcome this problem by partnering with outside, taxmotivated equity investors.

Through such a co-ownership arrangement, the

farmer will have the needed capital and the outside

investors will be able to fully capture all the tax

advantages. The partners have typically organized their

wind project as a limited liability company (LLC) because

of its comparative advantages over other forms of

business organization. 

The outside investor will control the majority of the

LLC, while the farmer has a minority ownership. After the

Federal Protection Tax Credit (PTC) for Renewable

Energy and depreciation are fully used by the outside

investor, the ownership will flip to the farmer, who then

becomes the majority investor, while the outside investor

owns a minority stake in the LLC.

The LLC form of business allows these partners to use

a tax structure favorable to taking advantage of the

production tax credits. It also allows the financial and

governance rights for the project to be split among the

landowners, developer and the equity investor.

Lease/Custom

Harvest Structures

Ethanol is currently produced mostly from sugars or

starches derived from fruits and grains. In contrast,

cellulosic ethanol is obtained from cellulose, the main

component of wood, straw and most plants. Since

cellulose cannot be digested by humans, the production

of cellulose does not compete with the productions of

food. Additionally, since cellulose is the main component

of plants, the entire plant can be harvested. The raw

material is plentiful. Cellulose is present in every plant:

straw, grass, wood. Most of these “bio-mass” products

are currently discarded or reside on cropland.

Although waste biomass will make a substantial

contribution towards large-scale cellulosic ethanol

New financing mechanisms for renewable energy 
Rural Cooperatives / January/February 2009 27

production, waste biomass alone cannot serve as the

only source of raw material supply. The big question is

whether American agricultural systems can support

large-scale cellulosic ethanol production. Several studies

indicate that it is possible. 

According to the “Near Term U.S. Biomass Potential”

report, dedicated energy crops would be required for

large-scale ethanol production from cellulosic biomass.

There are regions within the United States where

cellulosic biomass, such as switchgrass, can be

produced to support large-scale facilities. Landowners

and ag producers within these regions will have the

opportunity to participate and to take ownership of the

cellulosic ethanol market.

For landowners with limited ag production experience

and/or financial resources, lease or custom harvest

structures can be used to generate equity capital. The

landowner would lease land to an ag-producer to grow

cellulose crops or hire a custom harvester to harvest the

crops. Revenues from the rental payments can be used

to finance a cellulosic ethanol facility. 

For the custom harvest, the landowner would hire

those with special equipment to harvest the switchgrass

or clean up the field of wheat straw or corn stover. In the

case of forest land, the landowner would hire someone

to thin the wood on CRP land. This model can be used to

promote participation from Native American tribes, lowincome rural communities, and Conservation Reserve

Program (CRP) participants.

Renewable Energy Fund

The creation of a Renewable Energy Fund would

eliminate the need for multiple equity drives and address

the equity barrier for rural investors. Pooling equity

capital within rural communities will ensure that rural

residents own a share of cellulosic ethanol production

capacity in the future. Investment would be limited to

individual farmers, legal entities that own or manage

family farms and other individual investors living in rural

areas. There is about $26.8 billion of farm and non-farm

income available for investment within rural communities.

The cost of establishing an investment fund can vary,

depending on how the fund is set up. The least expensive

approach would be to establish an equity fund. However,

there are several factors which make this approach

somewhat problematic. 

If the fund is going to be a public offering, or at least

catered to a general audience, the cost could be

substantial. For example, cost for a direct public offering

would include legal, auditing and filing fees as well as

printing, advertising, strategic coordination, and

marketing. These fees and expenses can be as high as 8

percent of total estimated offering.

Clean Renewable

Energy Bonds (CREB)

The Federal Production Tax Credit (PTC) has been the

major method of financing for renewable energy projects

since it was established in the early 1990s. The PTC,

however, was designed to benefit larger investor-owned

utilities and to attract their capital into the renewable

energy marketplace. Non-profit electric utilities provide

about 25 percent of the nation’s electricity. Their taxexempt status makes them ineligible for the PTC. 

The National Rural Electric Cooperative Association

(NRECA) proposed that a “clean energy bond” be

created to establish an incentive for nonprofit electric

utilities that comparable in scope to the PTC. The CREB

program was modeled after the Qualified Zone Academy

Bond program, enacted in 1998 to provide tax incentives

for the rehabilitation of public school buildings.

The Clean Renewable Energy Bond (CREB) program is

a new tax incentive authorized in the Energy Policy Act of

2005. It is currently available to municipal utilities and

rural electric cooperatives and is designed to promote

renewable energy investment and development. The

CREB program provides these nonprofit utilities with

interest-free loans for financing qualified renewable

energy projects. 
28 January/February 2009 / Rural Cooperatives

By Lynn Pitman, 

University of Wisconsin Center for Co-ops 

Editor’s note: Conference presentations are available on the

University of Wisconsin Center for Cooperatives website:

http://uwcc.wisc.edu/farmercoops08/program.

quity and capital management issues continue

to drive major strategic decisionmaking by

today’s farmer cooperatives. Against a

backdrop of volatile markets and global

competition, cooperatives must develop

strategies that balance growth imperatives against risk and

supply chain cost management. More than 170 cooperative

board members, CEOs and others doing business with

agricultural cooperatives gathered in St. Paul, Minn., in

November to discuss “Cooperative Strategy, Structure and

Finance” at the 11th annual Farmer Cooperatives

Conference, organized by the University of Wisconsin

Center for Cooperatives.

Elements of a successful merger

Upstate Farms Cooperative and Niagara Milk Producers

Cooperative Inc. had discussed a merger in the past. As

value-added marketers of raw milk, both shared a similar

orientation toward product and quality, and both co-ops

operated in the same geographic area. Both were

member/owners of O-AT-KA Milk Products Coooperative,

which was created to guarantee markets for member milk. 

Their decision in 2006 to form Upstate Niagara

Cooperative Inc. was a win-win decision for both co-ops, said

Dan Wolf, president of the board of the new cooperative.

The merger provided an effective way to achieve operational

consolidations, and has provided strategic growth

opportunities that position the cooperative favorably for the

future. 

Similar earnings and member benefits meant that there

was no need to adjust member equity shares in the merged

cooperative. A board representation proposal that integrated

the boards and the delegate structure from Upstate is in the

process of being phased in. The merger included 90 percent

ownership of O-AT-KA, which continues to provide market

security by guaranteeing markets and providing value-added

products.

Strategy formulation and risk

Michael Boland, a professor at Kansas State University,

reviewed the process that underlies any effective corporate

E

Managing Risk Managing Risk 

Farmer Co-op Conference eyes strategies for doing business in volatile marketplace 

Inside the Upstate Niagara Cooperative dairy plant in New York, created through a merger of two co-ops to provide strategic

growth opportunities. Photo Courtesy Upstate Niagara
Rural Cooperatives / January/February 2009 29

strategic plan. Strategies are not just ratified by the board,

but should be formulated in concert with a general manager

or CEO.

Boland differentiated strategic planning — which relies on

an analysis of the parts of business — from strategic thinking,

which is a synthetic process of seeing the big picture. A

strategic perspective can exist on multiple levels, from a

conceptual perspective of the business, to its pattern of

conducting business over time, to its position in the market,

to strategic action plans to achieve an objective.

Landmark Service Cooperative CEO Larry Swalheim and

Board Chairman John Blaska presented the strategic planning

and risk assessment process that allows Landmark to meet

short- and long-term goals. Key assignments made during

the co-op’s annual strategic planning retreat help focus

management on top strategic initiatives. Verity Resources, a

joint venture created with AgQuest to provide in-house

producer financing, is another result of the past year’s

strategic goal setting. 

At Landmark, board committee meetings are effectively

used to push the strategic agenda forward, and are not simply

opportunities for division managers to “lobby for cash.” The

equity committee ensures that the program is synchronized

with the long-term capital needs of the cooperative. 

An internal audit committee has been formed to ensure

the identification, reporting and management of risk. Regular

risk management reports in eight different areas are used to

assess risk exposure; these reports mean that the board knows

exactly what its exposure is. 

This framework has allowed Landmark to move quickly

on new opportunities as they arise. The cooperative was able

to move quickly — in just three months last year — to forge

a merger with Grand River Cooperative. Both Blaska and

Swalheim agreed that it is strong and effective

communication between the board and management that

allows this framework to operate.

Strategies for maintaining co-op competiveness

Sunkist President and CEO Tim Lindgren and Board

Chairman Nicholas Bozick also discussed the need for good

communications between the board and management.

Lindgren noted that Sunkist uses committee work and places

emphasis on teamwork to avoid close, divisive votes. 

Sunkist has undertaken a variety of strategic initiatives to

maintain its competitive position and to improve returns to

its members. Today, Sunkist’s extensive marketing network

supports a widely recognized brand. 

The co-op’s global licensing program and other nonpatronage-sourced business generate significant unallocated

retained earnings that supply the majority of Sunkist’s equity

needs. This allows the cooperative to revolve member equity

out on a 5-year plan.

Sunkist has undertaken several initiatives to meet buyer

demand and to achieve operating efficiencies with its

facilities. Sunkist Global LLC sources counter-seasonal,

complementary non-member fruit. Sunkist/Taylor markets

fresh, pre-cut fruits and vegetables. A freeze in 2007

provided an opportunity to consolidate processing operations

into two plants that can meet the changing product demands

of the Sunkist customer.

Bob Broekelman, vice president for recruitment and

selection at FCCServices Inc., pointed to the looming

retirement of the baby-boomer demographic as another risk

that cooperatives must develop strategies to manage. This

group will be difficult to replace, given the next generation’s

smaller number and the dwindling number of those with a

background in agriculture. 

He discussed “Gen Y” the group now entering the

workforce for the first time, and how to recruit and retain

this future generation of workers.

Strategies for turbulent times

Amy Gales, central region president with CoBank,

outlined strategic guidelines that cooperatives might adopt in

these turbulent times. In her succinct review of the current

financial crisis leading up to the present situation, Gales

noted that the losses of $1 trillion have pulled $10 trillion

from the market, and the global de-leveraging has led to a

crisis of liquidity, capital and confidence.

Commercial banks have responded to current credit

market conditions by pricing to risk. There has been a flight

to quality and a reluctance to extend new credit, although the

first quarter of next year may see a freeing up of credit if the

market begins to settles down, she said. 

Farm credit institutions are positioned with quality

portfolios oriented to longer-term growth instead of quicker,

higher — and more risky — returns. These institutions are

reserving their liquidity for core borrowers, Gales said. 

As a government-sponsored entity (GSE), CoBank

continues to balance its mission with sound lending practices,

although it is not immune from the current situation, she

noted. As interest rates continue to rise, loan structures will

be more important. Increasing need for credit will make

market partners more difficult to find. 

Gales offered a “Top 10” list of strategies that cooperatives

can adopt to cope with a volatile financial landscape. She

noted that “cash is king” in times like these, and it is

important to improve working capital and manage debt so

that resources are available for inevitable bumps in the road. 

To maintain a strong emphasis on profit, there can be no

“sacred cows,” she stressed, and a cooperative must be willing

to act when margin objectives are met. Refining short-term

and long-term planning by understanding the cost of doing

business is another useful strategic focus.

Leverage is good, but only up to a point: the 1980s were

an example of what happens when highly leveraged farming

is faced with asset devaluation. Capital expenditures should

be made with an understanding of where they fit in on the

planning timeline, and preferably should be made without the

money to back them up. 
30 January/February 2009 / Rural Cooperatives

Managing the day-to-day financial operations — cash flow

and accounts receivable — brings benefits as well, Gales said. 

Risk management is an increasingly critical piece of

cooperative strategy, and new levels of procedures and

controls to manage price risk must be implemented.

Expertise is now more important than ever, and a CEO/CFO

strategic perspective, rather than a GM/Controller

operational perspective, can prepare a cooperative for future

challenges, Gales said. A board that really understands its

responsibilities and adds value to the organization can bring

another crucial perspective. 

Effective communications with all stakeholders, both

internally and externally, makes strategic implementation

possible. While these are economically challenging times,

Gales reminded the conference that there would be many

opportunities for those that were watching for them.

Managing supply-chain risk

Bruce Vernon, vice president of marketing for MKC, and

Cheryl Schmura, vice president of crop nutrients for CHS

Inc., examined the substantial challenges of managing risk in

today’s fertilizer-supply chain. Vernon described the

sometimes discontinuous relationship between inputs and

corn, and the substantial fluctuations in both. 

Former correlations in prices between inputs and natural

gas are not holding firm. The impact of global competition is

profound. Cooperatives now face volatile supply and demand

pricing, rather than one grounded in production costs, and a

more uncertain supply. 

Regardless of recent price volatility, said Vernon, the

cooperative must assume some measure of risk to service its

customers. To mitigate the risk, MKC is stressing reciprocity

on the part of both cooperative and customer: the buying and

selling of grain is linked to the buying and selling of inputs.

Schmura described how a complex interplay of factors,

including equity market and dollar valuations, a decline in the

skyrocketing price for grain and fertilizer, foreign trade

tariffs, weather events, and collapsing freight rates, has

contributed to an overall market situation in which market

players have lost trust in one another.

Smoothing out the extreme ups and downs of the

fertilizer-supply chain is a challenge. Farmers are hesitant to

place orders in a volatile market, and cooperatives can’t

assume the risk by importing product without customer

orders in place. 

The lack of demand has hampered movement in the

supply chain that would free up inventory space, allow dollar

averaging on the value of existing inventory, and support new

production and imports. Next spring may see stresses on the

system.

Cooperatives can address supply risk by finding partners

with multiple sourcing options, having a good relationship

with a bank, and planning based on “what-if” scenarios. Price

risk can be managed by locking in margin and not letting

greed take over the decisionmaking process. A good cash

position and reputable partners can support cooperative

performance.

Changes in cooperative business structures

Several case studies looked at the structural changes that

agricultural cooperatives have adopted to meet particular

challenges. Brian Henehan, senior extension associate at

Cornell University, and Kevin Murphy, Pro-Fac

Cooperative’s vice president of member relations, discussed

how Pro-Fac has strategically repositioned itself several times

in response to changing market conditions. Pro-Fac has used

innovations like transferable delivery rights, multicommodity pools, and equity conversion to publicly traded

securities to create liquidity for member investment. 

Murray Fulton, a professor at the University of

Saskatchewan, provided a cautionary tale about the need for

monitoring and oversight in his description of the events

leading up to the conversion of the Saskatchewan Wheat

Pool in 2005 to a business corporation. Overconfidence by

senior management and the lack of effective oversight by the

board of directors led to major investment strategies that

increased long-term debt five-fold over three years. 

Substantial internal funds from the 1996 IPO meant that

new ventures were not subject to the more dispassionate

analysis of outside equity markets. SWP’s aggressive new

business strategies ultimately failed, which led to the loss of

its cooperative status. 

Marvin Wiens, former board chairman of the

Saskatchewan Wheat Pool, provided his perspective as a

board member during that time. He resigned in 2004, when

both board and management agreed that SWP could not

longer survive as a cooperative. He cited these reasons for

this action: the board did not persist with hard questions and

exert financial control; the cooperative did not work to

maintain member loyalty during a competitive period; and

they lacked a shared vision.

Clarifying the objective of a strategic initiative — to

manage risk, share investment cost or provide market entry

— will aid in determining the structure to be used, said

Gregory McKee, professor at North Dakota State University. 

The North American Bison Cooperative chose to form an

alliance with North Dakota Natural Beef LLC (NDNB)

after it declared bankruptcy in 2005, to re-establish itself in

the market. Dieter Pape, who is the CEO and general

manager of both firms, described how the cooperative,

formed in the 1990s, built a processing plant, but

encountered severe financial problems because the market for

bison had not been adequately developed. 

The alliance with NDNB has provided the co-op with

needed marketing expertise as well as cost efficiencies. The

cooperative began paying patronage refunds for the first time

in 2007. A strategic alliance with North Dakota State

University has also provided NDNB with resources to

differentiate its products, a key advantage of a new market

entry.
Back to basics

David Barton, professor at Kansas State University,

provided a comprehensive review of the principles and

practices of cooperative finance. While profitability is

absolutely critical to success, a focus on services to

members and patrons is still required. 

Barton recommended that cooperatives consider

replacing traditional, qualified patronage distributions with

nonqualified ones, and that they practice strict balancesheet management and use a base-capital redemption

program. 

Chris Peterson, professor at Michigan State

University, stressed that the goal of cooperative finance

decisions is to deliver the cooperative’s value

proposition and to ensure that the cooperative can

maintain operations, make investments and pay

members appropriate returns. The total profit in the

system, on both the cooperative level and member

level, must be considered when assessing cooperative

performance and making investment decisions.

Peterson noted that a recent National Council of

Farmer Cooperatives study showed that those cooperatives

that can respond to changes in the marketplace continue to

do well, and that the cooperative model had not prohibited

them from finding creative ways to raise capital. 

Strategies for capital and equity

Central Valley Ag Cooperative (CVA) faced a complex set

of equity management issues that it assumed in a series of

mergers. Doug Derscheid, CEO of CVA, described how the

cooperative has worked to create a fair and equitable

approach for dividing the total redemption budget between

simplified equity classes. 

CVA is moving toward a revolving equity fund by using

nonqualified retained patronage refunds to pay down equity

debt, and cautiously using unallocated retained earnings to

contribute to capital reserves. 

The leveraged balance sheet of the recent past, with only

adequate working capital, will not work in today’s economic

climate, said Tom Houser, vice president of Agribusiness

Banking Group at CoBank. Higher levels of operating capital

will be needed to manage the risk associated with record

grain prices and crops’ input costs.

Cooperatives face several challenges in establishing

permanent capital. Many members see cooperative

profitability translating to member loss. 

But permanently retaining more equity can position the

co-op to revolve the allocated equity more quickly. While

there is a common mindset that equates a tax on cooperative

income as a negative, a co-op tax liability may benefit the

member in the long run. 

Legal perspectives on strategic planning and capital

management issues were provided by attorneys Mark

Hanson, Stoel Rives LLP, David Swanson, Dorsey &

Whitney LLP, and Michael Weaver, Lindquist and Vennum

PLLP. Swanson suggested that a long-term contractual

relationship is better than a transactional arrangement when

times are tough, but warned against assuming that a contract

party is solvent. 

Hanson encouraged cooperatives to review their business

operations to minimize capital needs while adjusting equity

programs to build a permanent capital base to address capital

risks. Weaver discussed the need for cooperatives to

recapitalize, given the aging of both assets and patrons. 

Former owners may be a source of outside capital.

Another approach to build equity was the use of an

unqualified per unit retain, which acts as a pretax

contribution to capital, as opposed to the nonqualified

allocation.

Michael Cook, professor at the University of Missouri,

provided an insightful wrap-up to the conference, noting that

the risk and volatility that characterizes the current economic

landscape was part of every presentation. He summarized the

questions that every strategic analysis should address: What is

the arena of business operations? What vehicles are used to

achieve success in that arena? How does the cooperative

differentiate itself with patrons and suppliers? What is the

timing and staging of business activities? Is there economic

logic to support these answers? 

Strategic thinking must also take the behavior of others,

especially rivals, into account, he noted. Furthermore, the

structures used to carry out business strategies are not neutral

regarding benefits and distributions, and ownership and

control. The board has a critical role in considering all of

these questions. ■

Rural Cooperatives / January/February 2009 31

Speakers who addressed the

Farmer Cooperative

Conference in St. Paul

included (clockwise from

upper left) Tom Houser, vice

president of the AgriBanking

group at CoBank; Marvin

Weins, former chairman of

the Saskatchewan Wheat

Pool; Cheryl Schmura, vice

president for crop nutrients

at CHS Inc. Photos courtesy University of Wisconsin

Center for Co-ops
32 January/February 2009 / Rural Cooperatives

By Dan Campbell, Editor 

s “big sister”

watching when you

read press releases

and publications

sent to your e-mail

box? Quite possibly. 

One cooperative communicator

says she uses a web-based delivery

service that enables her to see who

opens the attachments being sent,

and even what pages they read. Her

comments were made during an

idea-sharing roundtable on news

release strategies held last summer

at the Cooperative Communicators

Association (CCA) annual institute

in Portland, Maine. Other ideasharing roundtables focused on

strategies for co-op advertising,

employee and member

communications and website

management. 

Many CCA members say they

are using (and largely pleased with)

news services to distribute their

press releases and to track their use.

Regardless of whether they still

handle their own distribution or use

a media service, a big majority of

CCAers who participated in the

roundtable said e-mail is their

workhorse for getting news releases

out, although a few members said

they also still use the mail and fax. 

With e-mail comes a big added

advantage of being able to easily

attach a photo, which one

“consumer” of press releases said

greatly increases the odds he will

use a press release. 

Others raised the issue that a

print-quality photo attachment

might make the overall file too large

for small-capacity e-mail boxes.

They instead prefer to simply add a

“Photo Available on Request” note

News that

Gets Used

Media tips and ‘war stories’ abound

at CCA news release roundtable

USDA graphic by Stephen Thompson
Rural Cooperatives / January/February 2009 33

by their contact information. Some include a web link to a

page where media can download a choice of print-quality

photos (usually a jpg file of about 300 dpi at three inches

wide). 

Free advertising or news? 

Roundtable participants were reminded that the judge who

evaluated the press release entries for the previous year’s

CCA communications contest was critical of the fact that so

many of the entries lacked legitimate news value, and were

really “just attempts to nab some free advertising.” 

Some CCA members responded that they do indeed use

press releases for that purpose, but said there is a legitimate

business news aspect to announcing new products and

services, etc. They reported getting fairly good pickup on

these types of releases, especially by smaller papers and trade

publications. 

Still, the concern was raised that — like the boy who cried

“wolf ” — a co-op that issues too many press releases of

limited news value might run the risk of getting ignored

when it does have a release with important news. 

Several others noted the opposite problem: being told by

papers in their trade area that a press release with very

legitimate news value would have to be run as a paid

advertisement.

Some CCAers said they feel pressure to issue a certain

quota of press releases, even when real news is lacking, while

others said they think their co-op is too reluctant to issue

press releases and should be doing more.

Targeting news releases 

For large co-ops that operate over a wide region, it is best

to target press releases so that those with broad interest go

out on a general media list, while those that have a mostly

local appeal are sent only to appropriate local media. An

example of the latter would be a scholarship awarded by the

co-op, which will probably have little interest outside the

winner’s hometown paper or radio station.

“Local newspapers in our area will use anything local,”

one CCAer remarked. “A lot of times they need fillers and

are glad to use something ‘soft,’ like us making a donation to

a local charity or school.” 

Likewise, announcing a new feed division manager may be

of interest to the trade press, but not hold much interest for

the general media. 

CCA members also commented on: 

• Optimal length for a press release is about one to one and a

half pages, most felt. “Don’t write an epistle — less is more

with a press release,” one member said. Another

commented that “pages” become irrelevant with e-mail.

Still another raised the possibility of attaching both a

condensed, one-page version and a longer version (for

something like annual meeting highlights).

• Reaction was mixed on making followup calls to reporters

to see if a press release was received. One member reported

getting good results with such calls, but several others said

the practice is a definite “turn off” for editors and

reporters, one even calling it “deadly.” 

• Making calls to media at least once a year to keep your

distribution lists current is a must, several members

stressed. A number of media services can provide current

lists, “but the service is a little pricey,” another remarked.

Some CCAers said they strive to update media lists with

current names of editors and reporters, but others said they

keep addresses generic (e.g., “Business Editor”) because

staff changes occur so often in the media that it is hard to

keep up. 

• One member said that whenever he visits one of the co-op’s

plants, he drops by local media offices with an information

packet that contains the co-op’s latest annual report, fact

sheet and contact list, photo disc, recent news releases and

press clippings. “It’s a good door opener,” he said. 

• When bad news happens, don’t wait until forced to issue a

press release, most CCA members agreed. “It is better to

get out in front and shape the story as you would like,” one

commented. Another, whose co-op recently had to deal

with a disaster, was asked if the co-op brought in a PR firm

to help out. “There is no time to do that when disaster

strikes — you better be ready with a plan in hand,” she

responded. 

• When using quotes in a press release, make them

substantive, or don’t use them, one CCAer urged. For

example, skip quotes such as “We are pleased to announce

the results of another truly successful year by our co-op.”

These are fine in speeches, but there is no room for them

in a press release. Instead, go straight to the point: “Sales

and income both increased 8 percent last year due to

greater demand for our feed products.” 

• “Radio is the best bargain there is for getting the word out

to a local market,” a CCAer said, while another reported

good results with her efforts to get co-op officers to serve as

experts on local talk radio shows. 

• In addition to sending out the text of the release in the email message window, some also attach it as a MS Word

file; pdf attachments can be more difficult for the media to

work with. 

• “I always quiz reporters when they call me, asking: “How

did you find out about me?” one member said. 

• When it comes to responding to articles your co-op doesn’t

like, “pick your battles carefully,” one participant advised. 

• Post news releases to your website as soon as they are

distributed to media. 

One CCA member’s media philosophy summed up much

of what was said at the roundtables: “We work every day to

maintain strong media relations. It’s a never-ending job.” ■
34 January/February 2009 / Rural Cooperatives

Record sales,

income for Riceland 

Higher grain prices during the 2007-

08 marketing year resulted in record

sales and record distributions to

members of Riceland Foods Inc., a

farmer-owned cooperative.

Co-op President/CEO Danny

Kennedy told farmers at Riceland’s 88th

annual membership meeting in

Jonesboro, Ark., that total sales in fiscal

2008 reached a record $1.2 billion, up

nearly 30 percent from the previous

year and the first time co-op sales have

topped the billion-dollar mark.

Income before distributions to

Riceland’s farmer-members was a

record $707 million, an increase of

$158 million over the previous year,

Kennedy said. More than 97 percent of

those earnings were returned to

Riceland farmers in the form of

seasonal pool settlements or cash

payments for grain.

He credited the record year to the

rise in commodity prices — unlike

anything the industry had experienced

in 35 years — and to Riceland’s sales

team “staying on top of the market” and

all co-op offices managing costs. 

However, Kennedy said excitement

over grain prices was tempered by

rising productions costs, including

higher prices farmers paid for fuel,

fertilizer and other crop inputs.

Riceland also had to contend with

increased fuel costs to dry, transport

and process grain.

Riceland’s 2007-08 long-grain rice

marketing pool paid farmers an average

of $5.98 per bushel, 92 cents per bushel

more than the average price received by

farmers who self-priced their long grain

rice, the co-op reported. Last year’s

payment was $4.38 per bushel. The coop’s medium-grain rice pool paid an

average of $5.75 per bushel, compared

to $5.28 per bushel a year ago.

Kennedy said it was also “a

tremendous year” for the co-op in the

soybean and wheat markets. The

Newsline

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

Co-op developments, coast to coast

Riceland Foods sales topped $1 billion for the first time in fiscal 2008. Photo courtesy Riceland Foods
Rural Cooperatives / January/February 2009 35

performance of the rice and grain

markets for the 2007 crop year and the

cooperative’s seasonal marketing pools

illustrate the purpose and benefits of

pool marketing, Kennedy said. 

Riceland’s balance sheet shows total

assets stand at a record $721 million,

and permanent assets at $267 million.

Members’ equity, including capital and

retained earnings from taxable business,

increased to $213 million, up from $205

million the previous year. Long-term

debt was reduced by $4 million,

dropping to $54 million while working

capital increased to $66 million, up

from $59 million.

“The tagline on Riceland’s logo

means exactly what it says: ‘A FarmerOwned Cooperative.’ You own these

facilities and benefit from them by

having a reliable market and by

receiving competitive returns for your

grain,” Kennedy added.

Tree Top buys Oregon

fruit puree company 

Tree Top Inc. has purchased Sabroso

Co., a Medford, Ore.-based maker of

fruit purees, for an undisclosed amount.

The grower-owned cooperative is

expanding product lines and outlets for

fruit grown by its members, according

to the Yakima Herald-Republic. 

With $90 million in annual sales,

Sabroso is the nation’s leading

manufacturer and seller of fruit purees.

The firm also manufactures dried fruit

flakes and other products for the

ingredient and food-service markets.

Sabroso has plants in Medford and

Woodburn, Ore., and Oxnard, Calif.

Sharon Miracle, communications

manager for Tree Top, said Sabroso will

be a wholly owned subsidiary of Selahbased Tree Top. Miracle told the

Herald-Republic the two companies have

been discussing the purchase for about

a year. “It rounds out our offerings to

our customers. It also provides an outlet

for our growers.”

DFA pays $12 million

to settle with CFTC 

Dairy Farmers of America on Dec.

16 announced settlement with the

Conner to head NCFC

Charles F. Conner has been named president and

chief executive officer of the National Council of

Farmer Cooperatives (NCFC), a Washington, D.C.-

based trade association representing the interests of

U.S. agricultural cooperatives. Conner brings more

than 25 years of national and state government,

agricultural and trade association experience to his new

position. Conner has served as deputy secretary for the U.S. Department of

Agriculture since May 2005.

“We were extremely impressed with Mr. Conner’s career accomplishments, the

depth and breadth of his governmental and industry experience, as well as his

keen understanding of agricultural policy, trade issues and the business

challenges facing U.S. agriculture in general and agricultural cooperatives in

particular,” said Bill Davisson, NCFC’s chairman and the chief executive officer of

GROWMARK, who led the search committee. “He is uniquely qualified to lead

NCFC at a critical time, when the needs of NCFC members are changing in a

highly competitive global business environment.”

“Mr. Conner will bring a fresh perspective and dynamic leadership to NCFC,”

Davisson continued. “He has a passion for agriculture and a strong commitment

to the future success of agricultural cooperatives.” Conner was slated to begin

his new position at NCFC on or about Feb. 1, 2009. 

As Deputy Secretary at USDA, Conner served as chief operating officer,

overseeing day-to-day operations, including development of a $95 billion budget

for the 26 USDA agencies with 300 programs and more than 100,000 employees.

He represented USDA on the President’s Management Council, providing

executive expertise to proposed government-wide policy direction on key

management initiatives.

Conner interacted directly with President George W. Bush and his senior staff

to formulate domestic and international food, trade, security and energy policy. He

led development of the Bush Administration’s $300 billion Farm Bill proposal and

the strategy to educate and inform industry, constituents and Congress. 

From August 2007 to January 2008, Conner served as Acting USDA Secretary

and Deputy Secretary. He led an official delegation to Colombia and to a meeting

of the Food and Agriculture Organization in Rome, Italy, to enhance the United

States’ role in influencing global food and trade issues. In addition, he played a

key role in developing the administration’s immigration policy, including important

changes to the H2A program. His role in communicating USDA policy involved

print and television media. Conner’s experience also includes the assignment of

special assistant to the President, Executive Office of the President, from October

2001 to May 2005. In this role, he worked directly with President George W. Bush

and his senior staff on the 2001/02 Farm Bill to develop the strategy behind the

transfer of several USDA agency functions to the newly formed U.S. Department

of Homeland Security.

From May 1997 to October 2001, Conner served as president of the Corn

Refiners Association. He navigated and negotiated the interests of both large and

small companies to gain consensus on the association’s budget and policy

direction. In addition, he directed a successful World Trade Organization (WTO)

and NAFTA trade case against the Government of Mexico.

Conner is a graduate of Purdue University, with a Bachelor’s of Science degree

in ag economics and is the recipient of Purdue’s Distinguished Alumni Award.

Charles Conner
36 January/February 2009 / Rural Cooperatives

Commodity Futures Trading

Commission (CFTC) over charges that

the co-op manipulated Class III milk

futures contracts and exceeded a

speculative position limit. The

settlement ends the CFTC’s

investigation into DFA’s trading

activities on the Chicago Mercantile

Exchange (CME) in 2004. 

Kansas City-based DFA is one of

America’s leading milk marketing

cooperatives and is owned by 18,000

dairy farmers nationwide.

Without admitting or denying the

CFTC’s findings in the administrative

order, DFA and two of its former

officers — former CEO Gary Hanman

and former Chief Financial Officer

Gerald Bos — agreed to pay a penalty

of $12 million. The cooperative also

agreed to not engage in speculative

trading in milk futures contracts for two

years and to retain a monitor to review

its trading activities on the CME during

that period.

In DFA’s announcement, co-op

President/CEO Rick Smith said that

agreeing to the settlement was in the

best interests of the cooperative and its

members. The long-pending probe was

expensive and diverted time and

resources from DFA’s main mission of

serving its members, he said. 

“Settling this matter will allow us to

focus wholly on serving our members

and moving the cooperative forward,”

said Smith, who took the helm of the

cooperative in 2006, two years after the

trading activity in question. “The

transactions addressed by the settlement

took place over a one-month period

more than four years ago,” Smith

continued. “We have fully cooperated

with the CFTC’s investigation and

wanted to put this matter behind us.”

Prior to reaching the settlement

agreement, DFA management

voluntarily developed and implemented

new policies and procedures designed to

ensure that all trading complies with

both the spirit and the letter of the law,

Smith said. The DFA board and

management follow corporate values

that stress openness, transparency and

integrity, he added.

DFA’s actions constituted a

“manipulative scheme,” CFTC Acting

Director of Enforcement Stephen J.

Obie said in a press release. “Given the

severity of the past misconduct, we are

pleased that DFA has committed to

reform its trading practices.” 

The commission contends that from

May 21 through June 23, 2004, DFA,

Hanman and Bos attempted to

manipulate the price of the Class III

milk futures contracts through

purchases of block cheddar cheese on

the CME cheese spot-call market. The

order finds that the pricing relationship

between the CME block-cheese market

‘Co-op 100’ revenues top $173 billion in ’07 

The nation’s 100 highest revenue-earning cooperative businesses had record

sales of more than $173 billion in 2007. That’s up $24 billion from 2006, according to

NCB (formerly the National Cooperative Bank), which began compiling the NCB

Co-op 100 in 1991. In the 17 years since the first list was compiled, the amount of

revenue has more than doubled, from $81.4 billion in 1991. 

“During this challenging economic time, the strength of the cooperative

structure is even more evident for large and small businesses, in urban and rural

settings,” said Charles E. Snyder, president and CEO of NCB. “Cooperatives are a

driving force in today’s economy, generating nearly $250 billion in annual revenue,”

he added, noting that total co-op assets nationwide surpass $1 trillion.

Cooperatives directly employ nearly 500,000 people across the country, and –

when including indirect and induced effects – support more than 1.2 million jobs.

This year’s list saw both new and established cooperatives in the Co-op 100.

One new entrant is Farmers Cooperative Co., an agricultural cooperative that

increased its revenue to $592 million during 2007, up from the $384 million in 2006.

That earned the co-op the No. 81 slot on the NCB Co-op 100. 

Here are the top two revenue producers in each of the main sectors tracked by

the Co-op 100:

Agriculture Co-ops:

• CHS Inc., Saint Paul, Minn., $17.2 billion (also No. 1 on the overall list); 

• Dairy Farmers of America, Kansas City, Mo., $11.1 billion (also No. 2 on the overall

list);

Grocery Co-ops:

• TOPCO Associates LLC, Skokie, Ill., $8.8 billion;

• Wakefern Food Corp., Elizabeth, N.J., $7.8 billion;

Hardware & Lumber Co-ops:

• ACE Hardware, Oakbrook, Ill., $3.9 billion;

• Do It Best Corp., Fort Wayne, Ind., $2.7 billion;

Finance Co-ops: 

• Agribank, FCB, Saint Paul, Minn., $3.5 billion; 

• CoBank, Greenwood Village, Colo., $3.1 billion;

Healthcare Co-ops:

• HealthPartners Inc., South Bloomington, Minn., $2.7

billion; 

• Group Health Cooperative, Seattle, Wash., $2.6

billion;

Energy & Communications Co-ops:

• National Cable Television Cooperative Inc., Lenexa, Kan., $1.9 billion;

• Seminole Electric Cooperative, Tampa, Fla., $1.2 billion. 

The entire NCB Co-op 100 report is available at: www.ncb.coop.
Rural Cooperatives / January/February 2009 37

and the Class III milk futures market is

well known throughout the industry,

and the CME block-cheese market

price plays a significant part in

establishing Class III milk futures

prices.

Additionally, the DFA order finds

that on several days in 2004, DFA’s

speculative Class III milk futures

contracts exceeded the CME’s

speculative position limit, in violation of

the Commodity Exchange Act.

In addition to imposing civil

penalties, the DFA order bars Hanman

and Bos from trading futures for five

years. It also bars DFA from engaging

in speculative trading for two years and

orders DFA to: 1) retain a monitor to

ensure that DFA does not engage in

speculative trading and that DFA’s

Cheese spot call market cheese

purchases are made for legitimate

business purposes; 2) implementing a

compliance and ethics program; and 3)

providing future cooperation to the

CFTC.

As part of a separate order, Frank

Otis, former CEO of a DFA subsidiary,

will pay $60,000, and Glenn Millar,

former executive vice president of the

subsidiary, will pay $90,000 for

directing trading of Class III milk

futures in an internal sub-account

designated for a DFA subsidiary, the

CFTC news release said.

Blue Diamond says confidence

key to future market stability

Building and maintaining market

confidence is key to maintaining

California almond industry success,

according to Blue Diamond President

and CEO Doug Youngdahl. Record

industry almond shipments in 2007-08

exceeded the previous year by 18

percent, helping Blue Diamond achieve

record sales of $711 million, Youngdahl

told the cooperative’s grower-owners at

their 98th annual meeting. 

Total global consumption rose by 50

percent in the Middle East; 32 percent

in Eastern Europe; 24 percent in

Western Europe; 20 percent in Asia;

and 7 percent in the United States, the

largest single almond market. California

almonds are the state’s largest food

export valued at nearly $3 billion. 

Blue Diamond’s share of the record

2007-08 crop grew faster than the

industry as a whole, allowing the

cooperative to meet its tonnage

objective ahead of schedule. The co-op

also gained in market share. Its branded

retail business has doubled in three

years, tripled in five years and

quadrupled in six years. 

“Our Blue Diamond brand has

driven U.S. snack nut business growth

over the last six years, averaging over 25

percent [growth] annually,” Youngdahl

said. “With 21 percent of all meals

being labeled as snacks, snacking is fast

becoming America's ‘fourth meal’ of

the day,” he adds. 

Blue Diamond’s natural foods

business is also booming, with Almond

Breeze leading the non-dairy almond

milk sales category. The 2007 sales for

Almond Breeze increased by 32 percent

compared to the previous year. A new

refrigerated line of almond milk

products is expected to add to this

success in 2009. The product is

currently sold in aseptic packaging that

does not require refrigeration until

opened. 

Blue Diamond partly attributes the

growth of global almond consumption

to the favorable nutritional profile of

almonds. 

Looking ahead to a third record crop

of an estimated 1.5 billion pounds (9

percent above previous year) in 2008-

09, California almond consumption is

expected to continue to climb. However, this prediction comes with caveats

that include a water shortage that could

affect future crop size and kernel sizes

that will require creative new market

development. A strengthening dollar

could also affect global buying power as

it costs customers more to convert their

currency to dollars to purchase

almonds. 

In other Blue Diamond news:

• By a margin of more than two to

one, the co-op’s hourly workers in

Sacramento voted down a unionorganizing effort, the culmination of a

four-year campaign by the International

Longshore and Warehouse Union. The

vote was by secret ballot, although the

union had been pushing for a “cardcheck” election, in which union

members can get other workers to

“vote” for the union by signing a card. 

• The co-op is purchasing property

formerly owned by Hershey Co. in

Oakdale, Calif. The 13.5-acre property

includes more than 130,000 square feet

of cold storage. The increasingly large

almond crops mean the co-op needed

additional warehouse space to

supplement its warehouses in

Sacramento and outside Modesto.

WFC-MAC now

Cooperative Network

The Wisconsin Federation of

Cooperatives (WFC) and Minnesota

Association of Cooperatives (MAC)

have changed their name to

“Cooperative Network,” effective Jan.

1, 2009. Since 2004, WFC-MAC has

been operating as a unified, two-state

organization, sharing staff, program

ideas, education offerings and hosting a

joint annual meeting. 

One of the goals for the name

change was to create an organizational

name that encompassed all members
38 January/February 2009 / Rural Cooperatives

and that allowed for future growth.

At the organization’s annual meeting

in November, members confirmed the

new name and voted to restructure the

organization’s board to better

accommodate and represent members

from both states. 

“Under the new Cooperative

Network name, we reiterate that we are

one organization, acting in the best

interest of our members and our

communities throughout Minnesota

and Wisconsin,” says Bill Oemichen,

Cooperative Network president &

CEO.

Cooperative Network serves more

than 600 member-cooperatives, owned

by more than 6.3 million Wisconsin

and Minnesota residents.

It provides government relations,

education, marketing and technical

services for a wide variety of

cooperatives. For more information,

visit: www.cooperative network.coop.

Mooney to chair NMPF;

CWT to continue in ’09 

The National Milk Producers

Federation elected Randy Mooney as its

new chairman during its 2008 annual

meeting in Nashville, Tenn. Mooney

had been serving as assistant secretary

of the NMPF board. He, his wife and a

partner operate a 250-cow dairy in

Rogersville, Mo., where he has farmed

since 1979. Mooney also has a beef

cattle operation and is board vice

chairman of Dairy Farmers of America.

Mooney replaces outgoing chairman

Charles Beckendorf, who will remain

on the board until March.

During the annual meeting it was

also announced that Cooperatives

Working Together (CWT) has received

commitments from its members to

continue to fund the program in 2009.

“Now more than ever, CWT is the only

answer to the question of what farmers

can do to positively impact their milk

price,” said Jerry Kozak, president and

CEO of NMPF, which manages CWT.

“Both world and U.S. dairy markets are

sagging, and things look tough for

2009. Our members recognize that this

program is the best way to help balance

supply and demand and positively

impact producers’ bottom line.”

CWT removed 184 herds, with

61,000 cows that produced 1.2 billion

pounds of milk, through its second herd

retirement of 2008. CWT’s first herd

retirement of the year removed 25,000

cows that produced 430 million pounds

of milk. In addition, its export

assistance program has helped members

sell more than two billion pounds of

milk in 2008.

An independent economic analysis of

CWT, conducted last fall by Dr. Scott

Brown of the University of Missouri’s

College of Agriculture, demonstrated

that farmers’ return on investment in

CWT has been 76 cents per

hundredweight.

CHS notches fifth consecutive

year of record earnings in ‘08

CHS Inc. — the nation’s largest

cooperative and a leader in the energy,

grains and food sectors — reported

record net income of $803 million for

fiscal 2008, up from $756.7 million for

fiscal 2007. Total revenue of $32.2

billion was also a record and was up 87

percent from $17.2 billion in fiscal

2007. The increase in revenue was

largely attributed to higher values for

the energy, grains, crop nutrients and

other commodities the co-op handles,

the co-op said in a news release.

The fiscal 2008 results mark a fifth

consecutive year of record income and

revenue for CHS. As a producer-owned

cooperative, CHS returns a portion of

its earnings to eligible owners. In 2008,

based on 2007 performance, the

company issued a record $340 million

in cash patronage, equity redemptions,

preferred stock and dividends. Based on

2008 earnings, CHS is expected to

return about $340 million to owners

during fiscal 2009. 

The company’s 2008 earnings

reflected strong performance within all

Sunkist Growers and fast-food chain Chick-fil-A combined to set a new Guinness

World Record by creating an 839-gallon glass of lemonade in Tulsa, Okla., last summer.

The recipe: 2,175 cups of sugar, 580 gallons of water, 250 pounds of ice and 11,730

Sunkist lemons. The lemonade supplied several “Sunkist Take a Stand” lemonade

stands, which collected more than $10,000 for Little Light House, a Tulsa- based

developmental center serving young children with special needs. Last year, Sunkist

distributed 20,000 free lemonade stands to kids across Canada and the United States

to raise money for charity. Since inception, the Take a Stand program has raised

about $2.8 million for charity.
Rural Cooperatives / July/August 2008 39

business segments. The company’s Ag

Business unit, which consists of crop

nutrients, grain marketing and retail

operations, led the way. It experienced

strong global and domestic demand

along with record values for CHS’ ag

products. Ag Business earnings for fiscal

2008 also included a $91.7 million gain

on the sale of the company’s remaining

shares of CF Industries Holdings Inc., a

crop nutrients manufacturer. 

Energy earnings, while down from

2007 due to tighter refining margins,

remained strong and reflected record

performance from the company’s

lubricants and propane businesses.

Within the Processing segment, CHS

reported strong results for its own

oilseed-crushing and refining

operations, as well as its ownership of

Horizon Milling LLC, a flour miller.

Earnings fell for Ventura Foods LLC, a

vegetable-oil-based food manufacturer

and packager, of which CHS owns 50

percent. Ventura felt the impact of both

higher ingredient prices and the current

economic downturn. 

CHS recorded a $71.7 million ($55.3

million net of taxes) impairment on the

value of its investment in VeraSun

Energy Corp., an ethanol manufacturer

which filed for reorganization under

Chapter 11 bankruptcy statutes as a

result of downturns in that industry.

CHS owns approximately 8 percent of

VeraSun. 

CHS also saw record performance in

its corporate business solutions

operations, which include insurance,

risk management and financial services

businesses. 

CCA speakers available to

address key co-op issues 

The Speakers Bureau of the

Cooperative Communicators

Association (CCA) has more than a

dozen speakers available nationwide

who can address a wide range of topics

of interest to co-op members. “In an

association of communicators, it’s fair to

say that topics such as writing,

photography and video production,

website design and communications

strategies are among the Speakers

Bureau’s long suits,” says Jim Erickson,

chairman of the CCA Speakers Bureau

Committee. “But the list of subjects

that individual bureau’s members

present goes well beyond what you

might expect.” 

Leadership, board and management

development, cooperative-related

education, use of specialized software

and the “ins and outs” of working

effectively with the news media are

among other topics found on a lengthy

list of Speakers Bureau presentations on

the CCA website (www.communicators.

coop). One-man dramatic presentations

about author and humorist Mark Twain

and Minnesota Congressman Andrew

Volstead, who wrote legislation

generally viewed as the most important

act in U.S. co-op history, are offered as

well.

Going to the CCA website and

clicking on “Speakers Bureau” brings

up the bureau’s introductory page.

From there, click on links that provide

the list of available presentations, names

and photos of speakers, their

background and contact information,

guidelines for contacting and making

arrangements with a speaker and a

speaker request form. An evaluation

form also is available.

Because Speakers Bureau

participation is voluntary, a specific

speaker may not always be available

when requested. In such situations,

Erickson urges those needing a speaker

to contact the CCA office via the

organization’s website, or to e-mail him:

ericksonjim@att.net.

Also serving on the CCA Speakers

Bureau Committee are Cathy Merlo of

Bakersfield, Calif., and Jean Freeman of

Fairfax, Va. 

USDA program aims to help

African-American farmers 

In December, USDA announced that

it will provide $230,000 to help develop

pilot programs that address the “heir

property” issue, which has contributed

to an ongoing, multi-generational trend

of land loss by African-American

farmers. In announcing

the funding, a USDA

spokesperson said the

land-loss issue by black

farmers is “an old, old

problem, and we’re

looking for constructive

solutions. These funds

will help develop

creative approaches to

clarifying clouded titles

and stabilizing

ownership before it

becomes necessary to,

literally, ‘sell the farm.’”

Because of a variety of

factors in the post CivilWar era, many AfricanAmerican small farmers

died intestate. In the

absence of a will,

property typically passed

to multiple heirs with

undivided interests

(tenancy in common),

leading over time to highly fractionated

ownership patterns.

Fractionated ownership inhibits

borrowing, raises barriers to expansion

and modernization, and leads to

systematic under-use of affected

properties. Very often, these difficulties

Mark Twain (as portrayed by Mark Bagby of Calcot) is

among CCA’s roster of speakers who can address a

wide variety of topics at co-op meetings.
40 January/February 2009 / Rural Cooperatives

prompt the sale of heir properties, as

this is the easiest way for multiple

descendants to “cash out” their

interests. 

Consolidating title has therefore

been identified as a key strategic goal by

a number of African-American land-loss

prevention organizations.

In January 2007, USDA Rural

Development solicited comments on

possible approaches to the problem

from private, nonprofit communitybased organizations to develop

concrete, measurable work plans to

address the heir-property issue. 

USDA is now moving forward with

the next stage in that strategy, from

research and analysis to implementation. This is considered an important

step toward untangling a knot of

ownership issues that have been passed

along for generations. The ultimate

goal is to put affected farmers in a

position to compete more effectively in

the future.

Brownlee to fill key USDA

communications role 

Jim Brownlee, former information

director for USDA’s Agricultural

Cooperative Service (now the

Cooperative Programs of USDA Rural

Development), was recently named

USDA assistant director of

communications for public affairs.

Brownlee will have the responsibility of

providing communication leadership on

food, agriculture, rural development,

trade, energy, natural resources, science

and related issues. He says his goal is to

“use sound public affairs practices to

ensure that the

Department has an

effective and

coordinated voice on

all matters pertaining

to USDA.” 

The Office of

Communications is

the public pulse of

USDA, responsible

for coordination and

dissemination of

USDA information via www.usda.gov,

the Department’s acclaimed website.

His office reviews all information issued

by USDA and its 29 agencies and staff

offices. It also coordinates media,

constituent and stakeholder outreach. 

Brownlee received the 2008 USDA

Honor Award for his efforts to organize

the Washington International

Renewable Energy Conference, which

drew participants from around the

world and helped accelerate the drive to

develop renewable energy. He also acts

as an editorial consultant on USDA’s

Rural Cooperatives magazine. 

Earlier in his career, Brownlee was

communications director for Union

Equity cooperative in Enid, Okla.,

before going to work for USDA in

1992. He was president of the

Cooperative Communicators

Association in 1989-90, and received

that organization’s Grazank Award in

1989, recognizing him as one of the

nation’s outstanding young co-op

communicators. 

G&T co-ops support

Iowa wind farm

Six generation and transmission

cooperatives across the United States

are supporting a renewable energy

project, culminating with the

commercial operation of the 150-

megawatt (MW) Story County Wind

Energy Center in Story County, Iowa.

The project is owned and operated by a

subsidiary of FPL Energy and began

commercial operation in November.

This is believed to be the first time

several G&T cooperatives operating in

different regions of the country have

banded together to reap the benefits of

a large-scale wind project.

Participating co-ops are: Buckeye

Power Inc. (Ohio), PowerSouth Energy

Cooperative (serving Alabama and

Florida), Wabash Valley Power

Association (serving several Midwest

states, including Indiana), Hoosier

Energy (serving Indiana and Illinois),

Central Iowa Power Cooperative

(CIPCO) and North Carolina Electric

Membership Corporation. 

Participating jointly gives each G&T

co-op the ability to spread any risks

associated with the project, and to

participate on a pro-rata basis (taking

only the megawatt quantity desired) in a

sizeable and viable project with a highly

regarded developer in a wind-rich

region. 

USDA funding

biorefinery projects 

USDA Rural Development is

accepting applications for the Section

9003 Biorefinery Assistance Program

and seeking public comment on how

best to implement it. The program is

one of several renewable energy

provisions contained in the 2008 Farm

Bill. 

The Biorefinery Assistance Program

Jim Brownlee

The Story County Wind Energy Center in Iowa consists of 100 turbines, capable of

generating 150 megawatts of wind power. Photo courtesy PowerSouth Energy Co- op
Rural Cooperatives / July/August 2008 41

of new-generation capacity will be needed, including natural

gas, coal, nuclear and renewables. Nearly 40 gigawatts of new

renewable capacity will be needed just to meet state

requirements.” 

Capital spending to upgrade distribution and transmission

facilities nationwide may surpass investment in new

generation, the study found, EEI says. Spending on “smart

grid” technologies to ramp up efficiency — along with new

power lines to integrate renewable electricity sources — will

account for much of that spending. 

A “smart grid” uses technology to better manage electric

generation, transmission and consumption to reduce costs

and the impact on the environment, while improving service

and operating efficiencies. EEI estimates that utilities will

need to invest a minimum of $1.5 trillion during the next 20

years to meet basic infrastructure requirements. 

Broad energy portfolio needed

The Electric Power Research Institute (EPRI) has said

that a full portfolio of sources is necessary to meet both

energy and environmental needs. EPRI calls for a balanced

approach to limit carbon emissions, while maintaining system

reliability, sustaining economic growth and providing time

for development and deployment of technologies.

While carbon capture and storage will not be widely

available until after 2020, according to EPRI, a viable

solution will require a mix of strategies, including energy

efficiency, renewable resources, new nuclear capacity, clean

coal generation, carbon capture and storage, plug-in hybrid

vehicles and distributed energy resources. 

EPRI’s carbon dioxide reduction model calls for emissions

to be capped at 2010 levels until 2020, and then reduced by 3

percent annually. This approach is expected to reduce carbon

Utility Co-op Connection

continued from page 13

provides loan guarantees to develop,

construct and retrofit commercial-scale

biorefineries. The maximum loan

guarantee is $250 million per project,

subject to the availability of funds.

Preference is given to projects where

first-of-a-kind technology will be

deployed on a commercial scale. 

The deadline for completed

applications was Dec. 31, 2008, for

funding in the first half of fiscal 2009,

and is April 30, 2009, for funding in the

second half of the fiscal year. For more

information, visit: www.rurdev.usda.gov.

‘Grower-owned’ key to

Musselman’s new applesauce

advertising campaign 

In its newest advertising campaign,

which uses TV for the first time in

three years, Musselman’s is repositioning itself to better compete in the

applesauce category. Musselman’s is a

division of growers’ cooperative Knouse

Foods, based in Peach Glen, Pa. The

cooperative’s new campaign —

“Grower-Owned since 1949” — first

aired in mid-November. The new

campaign replaces Musselman’s

previous “Healthy Snack Alternative”

campaign. 

Consumer research shows that

“grower owned” also suggests quality

and freshness, and is unique vs. what

other brands in the category were

communicating, according to Knouse

Foods. Targeting moms with school-age

kids, two television commercials and

two outdoor billboards will run in five

test markets, from Philadelphia to

Minneapolis, each selected for high

potential share growth. 

Morning TV ads have been

appearing on programs such as

“Oprah,” “Good Morning America,”

“Ellen” and “The View.” Cable TV ads

will run on the Food Networks and the

Learning Channel, among others.

Outdoor billboard ads are being posted

in high-traffic areas, close to food retail

locations.

Lamb co-op buys out partner

Mountain States Lamb and Wool

Cooperative, Douglas, Wyo., has

purchased the remaining interest in

Mountain States Rosen, according to a

report in the “Casper Star-Tribune.”

The cooperative markets lamb

throughout the United States and in

some foreign markets. It features

producers from the region on packages

of lamb. 

The co-op, which has 140 family

producers in 13 states, says Mountain

States Rosen is the nation’s largest fullyintegrated lamb and veal company. 

Montana co-ops to merge

Laurel Town & Country Supply has

announced a merger with Farmers

Union Association of Big Horn County,

according to a report in the Laurel

(Montana) Outlook. Big Horn County

members approved the merger by the

required two-thirds majority at a

November meeting. The businesses will

operate under the Town & Country

Supply name. The merger will become

effective Feb. 1.

Town & Country General Manager

Wes Burley told the “Outlook” he

believes the merger will allow the

company to provide better service to its

patrons in both trade areas because it

will be able to purchase in larger

volumes from suppliers and the

businesses will be able to share

equipment, staff and management

personnel. 

The merger will add another farm

store, convenience store, agronomy

plant and bulk fuel and propane plant

to the Town & Country Supply

operation. Besides its farm store in

Laurel, it also operates a convenience

store/casino and a bulk fuel and

propane plant. It also has agronomy

plants in Bridger and Edgar, a

convenience store in Bridger, a

convenience store in Billings and a farm

store in Bridger. ■
42 January/February 2009 / Rural Cooperatives

supplier of blueberries, and with

members in 13 states and British

Columbia, co-op CEO Frank Bragg’s

interest in traceability has been driven

by the question: “Who knows the

source of that product?” 

The cooperative was the first in the

industry to use secure clamshell

packaging and now provides total

traceability. MBG can identify the day

particular blueberries were picked, the

field block they were picked from and

the people who picked the fruit. Setting

MBG apart from the other suppliers is

the co-op’s unique ability to also trace

the lot harvested in the field forward to

the customers that received it. 

Noting that each member has a food

safety program on their farm, MBG

Director Allen Miles adds: “Our

standards exceed USDA standards to

differentiate MBG from any other

marketer to put MBG on the cutting

edge.”

MBG was started in 1936 to provide

a fair return to members. Through the

cooperative’s sales force, it gives

grower-members a single voice in the

marketplace. The early years of the

cooperative coincided with a phase of

industry development that involved

transitioning from independent

segments to a more integrated,

coordinated system. 

Perhaps because the 72-year-old

cooperative retains an institutional

memory that if the milk buyers didn’t

come, milk had to be dumped, MBG

has kept the Sapiro-based marketorientation that contributed to its

creation. “MBG is continually looking

for ways to get closer to the consumer,”

notes Bragg. MBG is, therefore, highly

focused on improving the retailercustomer interface representing the

current phase of industry development. 

Fierce competition for emerging

markets has encouraged retailers to

pursue the basic norm of agricultural

industrialization: “the low-cost

producer survives” (Hogeland, 2006).

To deliver a consistent level of quality

to the consumer and squeeze out excess

costs, retailers have backward integrated

to the grower level. This can affect

what retailers are willing to pay

growers. Consumer price “rollbacks” by

retailers ignore the effect of inflation on

grower costs. 

Today’s market expansion and strong

prices portend a potential blueberry

market glut five years from now.

Production levels in 2013 are expected

to represent a doubling of 2008 levels.

Eventually, once quality improves,

lower-cost Chinese blueberries may

create import competition for U.S.

growers. 

If “costs are everything,” then the

product becomes a commodity and

procurement will be driven by the

cheapest price. California apricot

Making a Market

continued from page 6

dioxide emissions to 1990 levels by 2030.

USDA Rural Development’s Electric Program is playing a

key role in this effort. “Our goal is to help further the

advancement of these technologies,” the USDA report says. 

USDA is assisting Basin Electric Cooperative in North

Dakota with the installation of carbon-capture technology at

an existing coal-fired generation plant. When operational,

the technology will remove a portion of carbon dioxide and

feed it into Basin’s compression and pipeline system. Smaller

portions of carbon dioxide will be removed from the pipeline

to test sequestration capability.

Former USDA Secretary Ed Schafer, in a recent address

to Basin Electric Power Cooperative’s annual meeting, told

co-op members that “Finding ways to expand our use of coal

while protecting the environment will open up great

possibilities for the nation as a whole....Historically, coalfired plants have been the backbone of electric power

generation in rural America, providing close to 60 percent of

its power.” 

Schafer said that while utilities continue to pursue new

energy sources, “taking coal out of the equation leaves a gap

that will be difficult to fill.”

Carbon reduction technology costly 

“To develop a successful strategy to reduce carbon dioxide

emissions requires a strong investment in what is already a

capital-intensive sector of the economy,” explains Former

Rural Development Utilities Program Administrator Jim

Andrew. “Times are changing, and we must change with the

times.”

Another good example of these changes — the new

National Renewables Cooperative Organization (NRCO) —

will also help rural electric utilities meet renewable portfolio

standards.” 

Rural electric cooperatives from approximately 20 states

joined to form the NRCO to facilitate development of

renewable resources nationwide, help co-ops meet renewable

portfolio standards and assist with legislative and regulatory

initiatives. 

Cooperatives, owned by their members, have said that

consumers must be considered in greenhouse gas emission

policies because of the costs associated with climate-change

goals.

“The economy of this country is highly dependent on

reliable electricity...that dependence is growing as more of

the economy shifts to the service sector and as we move to

energy dependence,” the USDA report notes. “The

development of alternative transportation fuels, regardless of

the feedstock, will also require significant sources of new

generation. 

“Continued development and improvement of new

renewable generation technologies, the manufacture of these

technologies and their development to reduce emissions will

add economic and employment opportunities,” it continues.

“Much of that investment will be in rural America.” ■
Rural Cooperatives / July/August 2008 43

growers were undermined by

competition from cheaper Turkish

apricots.

Protection for suppliers

Suppliers can protect themselves by

offering retailers a better understanding

of the consumer, by recognizing

purchasing patterns from retail data, or

by interpreting market signals to

identify what is and isn’t selling. SunMaid targets more than a 99-percent

order-fulfillment rate and 95-percent

on-time delivery. This is especially

significant because Sun-Maid is the

world’s largest producer and processor

of dried fruit and represents more than

one-third of California’s raisin growers. 

To John Shelford, CEO of MBG’s

affiliated grower organization, Naturipe

Farms Grower Services LLC,

efficiencies come from providing value

to the customer through a guaranteed

supply of blueberries, blackberries,

strawberries, etc. As a perishable

product filling a niche market, berry

production based on a high-volume,

industrialized model matters less than

continuous product availability, a

concept MBG calls “selling the

category.” 

Naturipe Farms markets fruit from

all over the world to establish its

credibility as a year-round supplier.

This led MBG to successfully develop a

market for late-season blueberries.

Marketing 12 months each year enabled

the cooperative to spread costs to

support a fresh-product sales team. 

Contributing to successful global

marketing are the right partnerships

that can preserve grower interests as

retailers consolidate. In December

2008, Sunsweet, the world’s largest

prune packer, and ShoEi Foods USA

(the third largest prune packer in

California), formed a joint processing

alliance. This united the latest

technology for responding to consumer

taste preferences and sensitivity to food

safety. ShoEi USA will contribute a

proprietary preservative-free process to

the alliance to attain the highest

possible degree of food safety, sanitation

and fresh prune flavor for Japan and

other high-specification customers. 

To achieve this, the alliance will

result in a specially constructed,

enclosed processing area where

Sunsweet Growers can apply its worldclass patented processing and pitting

systems to dry, process and pack all

ShoEi USA prune products. 

Foreign-sourced fruit concerns

When MBG was offered a source of

contra-seasonal fruit supply, some

members filtered this through the

traditional belief that cooperatives

should not compete with their

members. (This was a norm that

contributed to the loss of significant

cooperative presence in the pork

industry — see Hogeland, 2006). To

this “all you are doing is helping

competitors succeed” stance, Bragg

replied: “They’ll be successful with or

without us.” 

In fact, Reardon indicates that

effective global marketing is

relationship-based. Chains need

suppliers who will connect growers in

one emerging market with customers in

another. Sunsweet recognized that new

prune-plum orchards planted in Chile

and Argentina could depress prices by

increasing world supply. The

cooperative has actively engaged

Chilean growers in market

development, education and advertising.

By increasing the farming skills of highpotential local growers, Sunsweet

actively manages the quality of the

product fed into local or global supply

chains. Through direct sourcing and

programs putting local suppliers on a

par with foreign competition, Reardon

anticipates marketing infrastructures

will naturally evolve to encompass new

super markets. 

Indeed, a premium-quality Chilean

sourcing presence positions Sunsweet to

capture high-value opportunities in

emerging global food markets.

Moreover, foreign sourcing reinforces

cooperative control over the world’s

largest prune supply. Since 2005,

Sunsweet’s market has grown by 32

percent and revenue has increased by

$75 million.

In this era of emerging markets and

food scares, better market

access requires improved product

information and handling (including

speed of delivery), multi-site production

and sales locations, and

product sensitivity to changing

demographics, cultures, climates and

tastes. Sunsweet, MBG Marketing and

Sun-Maid demonstrate how

cooperatives can offer market access to

retailers based on these

criteria. ■

Selected References

Hogeland, Julie A.:

(a) Forthcoming 2009 “The

normative construction of

American agricultural

cooperatives, 1900-2008.” In

Cooperation. Marshall, Robert C.,

ed. Walnut Creek CA: AltaMira

Press.

(b) 2006 “The economic culture of

U.S. agricultural cooperatives,”

Culture & Agriculture, 28:67-79.

http://www.rurdev.usda.gov/rbs/pu

b/rr5.pdf.

Nourse, Edwin:

1922 The economic philosophy of

cooperation. The American

Economic Review 12:577-597.

Persaud, Suresh and Tweeten,

Luther: 

2002 “Impact of Agribusiness

Market Power on Farmers” In

Agricultural Policy in the 21st

century. Tweeten, Luther and

Stanley R. Thompson, eds. Ames:

Iowa State University Press: 127-

145.

Reardon, Thomas:

2007 “Supermarket Revolution:

The Supermarket Revolution in

Emerging Markets: Implications

for the Produce Industry.” Brief

prepared for the Produce

Marketing Association, December,

2007. Newark, Del.: Produce

Marketing Association.
44 January/February 2009 / Rural Cooperatives

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