Hogging

the Market

How Co-ops are

Responding to 

Hog Price Crisis

USDA / Rural Development May/June 1999

Rural
We recently reported that so much dramatic structural change had occurred in the cooperative community

in 1998 that it was not likely to soon be repeated. Yet —

just halfway through 1999 — we have already seen dramatic proposals for structural changes of equal or

greater magnitude. Cooperative leaders are being challenged to respond to the unprecedented wave of consolidation in the food sector and the “corporate-ization”

process which, if unchecked, could well displace conventional, family-farm producers or leave them as piecewage growers who are paid by huge corporations.

This would be a tremendous loss for the nation

and especially for our rural people and communities.

When rural people lose control of their resources,

more dollars are siphoned away from rural towns to

corporate headquarters.

Cooperatives are a natural answer to the challenge

of maintaining a dispersed ownership of our nation’s precious agricultural resources. Cooperatives allow farmerentrepreneurs to join together to increase their marketing and purchasing power in organizations that provide

them market access. Co-ops allow rural farmers, craftmakers and others to practice self-determination through

democratically controlled businesses.

As we prove with every issue of this publication,

the cooperative business structure is certainly not outdated. Indeed, cooperatives are on the cutting edge of

necessary change. But for many livestock and commodity sectors, we have reached the eleventh hour.

Change must be forthcoming, or the opportunity to

maintain producer control of some sectors of the economy may be lost forever.

Within the livestock industry, only the dairy sector

has made extensive use of cooperatives to provide

producers entry into certain markets and a voice that

is heard in industry circles and in the halls of Congress. The Prairie Farms Dairy article in this issue

(page 16) shows that it is possible for a farmer-owned

cooperative to perform well in an industry typified by

intense competition and by low profit margins.

The beef, pork and sheep subsectors have been

slow to embrace cooperative marketing as a strategy

that could bring them closer to the consuming public

and generate the extra income that would result. As

shown in the article on the hog industry (page 8), there

are numerous ongoing attempts to build on existing

cooperative pork marketing channels and to create

new co-op business structures.

These are positive steps that address the industry’s core problems. Others are being taken. In fact,

some far-reaching proposals are being discussed that

would bring further producer ownership and control of

the livestock system closer to reality.

Recent proposals to merge Cenex/Harvest States

and Farmland Industries, and the purchase of Terra

Industries’ crop nutrient and protectant distribution

system by the Cenex/Land O’Lakes Agronomy Co., are

just two examples of cooperative restructuring on the

horizon. Each portends a re-visit to existing cooperative institutional relationships, including ownership in

inter-regional cooperatives and joint ventures.

The Page from the Past feature (page 31) in this

issue is also timely, describing the acquisition of Welch

Foods by the National Grape Cooperative. This presents another approach to establishing a strong market presence for a farmer-owned cooperative. Similar

conversions of investor-owned firms to cooperatives

have been achieved by other co-ops.

In an era of rapid consolidation and deep public policy concerns about concentration in the food industry,

cooperative ownership represents a choice that the farm

sector needs to give further consideration and to actively pursue. But time is running out in some sectors.

Jill Long Thompson

Under Secretary, USDA Rural Development

2 May/June 1999 / Rural Cooperatives

The 11th Hour for Structural Change 
4 Improving Their Worth

Farmer co-ops’ 1997 value-added activities rise to $10.1 billion

Charles A. Kraenzle

8 Hogging The Market 

How co-ops are responding to hog price crisis

Catherine Merlo

15 The Prime of Prairie Farms Dairy 

Midwest dairy co-op has producers asking to become members

Catherine Merlo 

19 Transworld Traders

With 1997’s record exports, U.S. farm cooperatives prove their

ability in the global marketplace

Tracey L. Kennedy

22 A Fight for Survival

Co-op members hope extra profits will help preserve a way of life

they see rapidly disappearing on the prairie

Valerie Berton

7 A CLOSER LOOK AT...

14 IN THE SPOTLIGHT

18 LEGAL CORNER

24 NEWSLINE

30 PAGE FROM THE PAST

32 NEW PUBLICATIONS

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Dan Glickman, Secretary of Agriculture

Jill Long Thompson, Under Secretary,

Rural Development

Dayton J. Watkins, Administrator,

Rural Business–Cooperative Service

Randall Torgerson, Deputy Administrator,

RBS Cooperative Services

Catherine Merlo, Editor

USDA Design Center, Design

Rural

May/June 1999 

Volume 66 Number 3

Have a cooperative-related question? Call 

(202) 720-6483, or FAX: Information Director,

(202) 720-4641.

This publication was printed with vegetable oil-based ink.

On the Cover: Donna Reifscneider, an

Illinois hog farmer and former president of

the National Pork Producers Council, performs health inspections with her veterinarian on her Smithton, Ill., farm. For a report

on the hog-price collapse and how co-ops are

helping pork producers compete and survive,

see page 8. Photo courtesy of the National Pork

Producers Council.

Story on pages 8-14.
4 May/June 1999 / Rural Cooperatives

Charles A. Kraenzle

Director, Statistics, USDA/RBS

David E. Cummins

Agricultural Economist, USDA/RBS

Adding value to agricultural commodities by organized cooperatives has been receiving increasing attention from farmers and ranchers.

This has been demonstrated by cooperatives increased involvement in processing

farm commodities into crop and livestock

products, such as beef, pork, sugar and

ethanol. The idea is to capture more

income for producer-members by integrating further up the marketing channel.

Cooperatives add value to the products they market, to the supplies they sell

and the services they provide in a number of ways. They gather raw commodities and farm supplies in one place. They

change the form and location of such commodities into products available for sale,

thus adding value to what they do. The

research presented here measures the

value-added by these activities during

1994-97.

In 1997, the net “value-added” of

farmer cooperatives totaled $10.1 billion,

an increase of nearly $1.5 billion, or 17

percent, since 1994. Value-added income

represents the earnings from land, labor,

capital and management contributed by

farmer cooperatives. For this study,

value-added was calculated by adding coops’ reported (1) wages and benefits, (2)

net income before taxes, (3) interest paid

on borrowed capital and (4) depreciation.

The first three components equal net

value-added (NVA). All four components,

collectively, represent gross value-added

(GVA), which is NVA plus depreciation.

In simple terms, this method of measuring GVA is equivalent to subtracting cost

of goods sold and total expenses from

total net sales and adding service

receipts and other income.

Why calculate cooperatives’ value-added

activities? Cooperatives’ value-added:

• Better represents the contribution made

Improving Their Worth

Farmer co-ops’ 1997 value-added activities rise to $10.1 billion

Table 1—Cooperatives’ gross and net

value-added, by component, 1994-97

Component 1994 1995 1996 1997

Million dollars

Wages and benefits 6,057 6,542 6,720 6,846

Net income before taxes 1,963 2,358 2,248 2,332

Depreciation 1,355 1,394 1,432 1,594

Interest paid 653 857 1,012 971

Gross value-added 10,028 11,151 11,412 11,743

Net value-added 2 8,673 9,757 9,980 10,149

Percent of gross value-added

Wages and benefits 60.4 58.7 58.9 58.3

Net income before taxes 19.6 21.1 19.7 19.9

Depreciation 13.5 12.5 12.5 13.6

Interest paid 6.5 7.7 8.9 8.3

Gross value-added 100.0 100.0 100.0 100.0

Percent of net value-added

Wages and benefits 69.8 67.1 67.3 67.5

Net income before taxes 22.6 24.2 22.5 23.0

Interest paid 7.5 8.8 10.1 9.6

Net value-added 100.0 100.0 100.0 100.0

1 Totals may not add due to rounding. Data for 1994 and 1995

were revised.

2 Gross value-added less depreciation.

Table 3—Average of components and average total net value-added, 1994-971

Type of co-op Wages Net Income Interest Total net

& benefits before taxes paid valueadded

Million dollars

Cotton 70 84 30 184 

Dairy 1,052 340 74 1,466 

Fruit & vegetable 1,115 157 146 1,418 

Grain and oilseed2 871 376 195 1,441 

Livestock 259 151 67 477 

Poultry3 342 35 24 402 

Rice 102 11 16 129 

Sugar 196 7 33 236 

Other marketing4 440 70 71 580 

Farm Supply 1,796 852 207 2,855 

Cotton gin 88 113 6 207 

Other Service 210 30 4 244

Total 6,541 2,225 873 9,640

Percent 

Cotton 37.9 45.9 16.2 100.0 

Dairy 71.7 23.2 5.0 100.0 

Fruit & vegetable 78.6 11.0 10.3 100.0 

Grain & oilseed2 60.4 26.1 13.5 100.0 

Livestock 54.4 31.6 14.0 100.0 

Poultry3 85.3 8.7 6.0 100.0 

Rice 79.2 8.5 12.3 100.0 

Sugar 83.1 2.8 14.2 100.0 

Other marketing4 75.7 12.1 12.2 100.0 

Farm Supply 62.9 29.8 7.2 100.0 

Cotton gin 42.6 54.4 3.1 100.0 

Other Service 86.1 12.1 1.8 100.0

Total 67.9 23.1 9.1 100.0

1 Totals may not add due to rounding.

2 Excludes cottonseed.

3 Includes eggs, turkeys, ratite, squab and related products.

4 Includes nut, tobacco, wool and mohair, dry bean and pea,

fishery and miscellaneous marketing cooperatives.

Table 2—Farmer cooperatives' net 

value-added, by type, 1994-971

Type of cooperative 1994 1995 1996 1997

Million dollars

Cotton 173 172 193 198

Dairy 1,377 1,452 1,471 1,565

Fruit and vegetable 1,263 1,453 1,507 1,450

Grain and oilseed2 1,284 1,437 1,569 1,475

Livestock 367 464 492 585

Poultry3 319 387 451 449

Rice 118 130 130 138

Sugar 174 213 212 344

Other marketing4 461 691 531 638

Farm supply 2,714 2,867 2,969 2,872

Cotton gin 197 210 184 238

Other service 227 281 272 197

Total 8,673 9,757 9,980 10,149

1 Totals may not add due to rounding.

2 Excludes cottonseed.

3 Includes eggs, turkeys, ratite, squab and related products.

4 Includes nut, tobacco, wool and mohair, dry bean and pea,

fishery and miscellaneous marketing cooperatives.
Rural Cooperatives / May/June 1999 5

by cooperatives to value-added from agricultural commodities by function and type;

• Helps cooperative leaders and policy

makers improve decision-making by showing

where value-added may be enhanced;

• Yields time-series data that will help

track cooperatives’ progress and trends;

and

• Provides additional information to

further educate producers and others on

the cooperative way of doing business.

Co-ops’ GVA and NVA increased

In 1994, co-ops’ GVA totaled more than

$10 billion. GVA grew, and totaled more

than $11.7 billion in 1997. NVA (GVA

minus depreciation) also grew, from $8.7

billion in 1994 to $10.1 billion in 1997 (figure 1).

Wages and benefits represented the

major contribution to co-ops’ value-added.

From 1994 to 1997, it contributed about 59

percent to GVA and about 68 percent to

NVA. Net income before taxes was the second major component. It contributed about

20 percent to GVA and about 23 percent to

NVA during the four years. The relative

proportions of the components making up

both GVA and NVA were fairly stable over

the four years (table 1).

How did changes in co-ops’ NVA compare to changes in co-ops’ net business volume? Year-to-year changes in NVA were

somewhat different from changes in net

business volume. Co-ops’ NVA increased

12.5 percent from 1994 to 1995, while net

business volume was up only 5 percent.

However, NVA increased only 2.3 percent

from 1995 to 1996, while net business volume increased 13.2 percent, mainly due to

increased marketing of grains and oilseeds

and higher prices. NVA was up 1.7 percent

in 1997 and net business volume was

about the same as in 1996.

Gross and net value-added are also used

to measure the performance of other sectors of the economy. USDA’s Economic

Research Service (ERS) uses the valueadded format to present the farm income

accounts. According to ERS, the valueadded format makes it much easier to discern what forces are driving the changes

and trends in farm income. In addition, the

value-added format is accepted and utilized

internationally, thereby facilitating comparisons among countries.

The value-added contribution to the

U.S. economy by the agricultural, or farm

sector gives some perspective to the valueadded contributed by farmer cooperatives.

Net value-added for the U.S. agricultural

sector totaled $85.3 billion in 1994, nearly

10 times the NVA of farm cooperatives (figure 2). In 1995, NVA contributed by the

agricultural sector dropped to $74.8 billion,

due to lower output of crop and livestock

volume. In 1996, it reached $96.3 billion,

before dropping to $92.8 billion in 1997.

In 1997,marketing cooperatives accounted

for nearly 68 percent of co-ops’ gross and net

value-added, farm supply, 28 percent and

related-service cooperatives, 4 percent.

Marketing cooperatives increased their share

of both GVA and NVA during 1994-97. In

1994, marketing cooperatives accounted for

nearly 64 percent of NVA and farm supply

cooperatives, 31 percent.

Wages and benefits accounted for 68 to 73

percent of marketing cooperatives’ total NVA

during the study period. In comparison, wages

and benefits ranged from 61 to 64 percent of

total NVA for farm supply cooperatives.

Marketing cooperatives, especially those

involved in further processing of farm commodities, generally employed more full- and

part-time employees than did farm supply

cooperatives. Interest paid also contributed a

larger proportion to NVA for marketing cooperatives than for farm supply cooperatives.

Consequently, net income before taxes contributed a noticeably larger proportion to NVA

for farm supply cooperatives than for marketing cooperatives.

NVA by type of cooperative

Dairy, fruit/vegetable and grain/oilseed

cooperatives accounted for $3.9 billion, or

45 percent, of co-ops’ total NVA in 1994 and

$4.5 billion, or 44 percent, in 1997. Each

contributed about equally during the period. Although their total contribution to

NVA increased during the study period,

their proportion decreased due to increased

contributions to NVA by livestock, poultry,

sugar and “other marketing” cooperatives

(table 2).

Wages and benefits major component of NVA 

Total co-ops’ wages and benefits averaged nearly 68 percent of total NVA during 1994-97. Net income before taxes

(NIBT) accounted for 23 percent and

interest paid the remaining 9 percent

(table 3). Wages and benefits averaged

the largest proportion (all above 80 percent) of net value added for “other service,” poultry and sugar cooperatives. The

proportion was in the 70s for rice,

Table 4—Net value added per dollar of

sales by type of co-op, 19971

Type of co-op Co-ops Net Total Net value

value- sales added per 

added $1 sale

No. Million dollars Percent

Cotton 16 198 3,004 0.07 

Dairy 236 1,565 23,374 0.07 

Fruit & vegetable 259 1,450 9,268 0.16 

Grain & oilseed2 1,014 1,475 24,639 0.06 

Livestock 88 585 7,460 0.08 

Poultry3 20 449 2,118 0.21 

Rice 18 138 930 0.15 

Sugar 51 344 2,087 0.16 

Other marketing4 239 638 4,765 0.13 

Farm Supply 1,386 2,872 25,181 0.11 

Service5 464 435 3,647 0.12 

Total 3,791 10,149 106,474 0.10

1 Includes marketings, farm supply sales, service receipts and

other income. Excludes business done between cooperatives. Totals may not add due to rounding.

2 Excludes cottonseed.

3 Includes eggs, turkeys, ratite, squab and related products.

4 Includes nut, tobacco, wool and mohair, dry bean and pea,

fishery and miscellaneous marketing cooperatives.

5 Includes trucking, cotton ginning, storage, grinding, etc.

related to the marketing of farm products and the sales of

farm supplies.
fruit/vegetable, “other marketing” and

dairy cooperatives.

Net income before taxes was the major

component of NVA for cotton ginning and

cotton cooperatives, at 54 percent and 46

percent, respectively. Among the types of

cooperatives listed in Table 3, NIBT was

the lowest for sugar, rice and poultry cooperatives. What does this mean? It’s difficult to say without further study of the

industry in which the various types of

cooperatives compete. For example, a low

contribution of NIBT could be due to cooperative objectives or goals, such as bargaining versus processing, competition

with other co-ops or investor-owned firms

within the industry, management and/or

cooperation with other cooperatives.

The proportion of interest paid to NVA

was highest among cotton, sugar, livestock

and grain/oilseed cooperatives, all above

13 percent. Interest paid, of course, is a

function of debt and would be expected to

contribute a larger percentage to NVA

among co-ops highly leveraged and/or

financing a large inventory.

Where can cooperatives improve

value-added?

In recent years, much interest has been

generated by farmers in adding value to

their raw commodities through greater

involvement in marketing and/or further

processing. In many cases, this vertical

integration further up the marketing

chain has been accomplished through the

organization of new generation cooperatives, like United Spring Wheat

Processors, 21st Century Alliance and U.S.

Premium Beef. These co-ops add more

value to the raw commodities than do the

traditional buy-sell ones. However, there is

much more value that farmer cooperatives

can add to what they market. A popular

vehicle for accomplishing this is the formation of alliances, particularly joint ventures, involving other cooperatives.

To examine how the various types of

cooperatives compare in adding value to

the products and services they provide, net

value-added per dollar of total sales was

calculated (table 4). Net value-added per

dollar of sales ranged from a low of 6 cents

for grain/oilseed cooperatives to a high of

21 cents for poultry cooperatives.

Cooperatives with lower ratios tend to be

traditional buy-sell. Several of the poultry

cooperatives, which includes eggs, turkeys,

ratite and other related products, are highly involved in processing and other valueadded activities.

What are the implications? 

Farmer cooperatives have been

increasing the value of traditional raw

commodities they market as well as the

supplies and services they purchase.

However, according to the NVA per dollar

of sales, it appears there is considerable

potential for adding value, especially in

the marketing of grains/oilseeds, milk and

cotton. If farmer cooperatives could, on

average, add even an additional $.01 of

net value-added per dollar of sales

through greater involvement in processing and other value-added activities, net

value added could be increased by more

than $1 billion.

Farmer cooperatives have the opportunity to enhance their members’ income

through greater involvement in valueadded activities, not only by doing more

processing and marketing of the volume of

commodities moving through their cooperatives, but also by increasing the share of

products marketed and supplies purchased through cooperatives. In 1997,

farmer cooperatives marketed only 31 percent of the farm products moving off the

farm and 30 percent of the major farm

supplies — feed, seed, fertilizer, petroleum

and crop protectants — purchased by

farmers. ■

Figure 1—Co-op’s Gross and Net ValueAdded, 1994-97

12

11

10

9

8

7

1994 1995 1996 1997

Bil.$

GVA

NVA

Figure 2—Comparison of Co-op’s NVA

with U.S. Ag. Sector NVA. 1994-97

120

100

80

60

40

20

0

1994 1995 1996 1997

Bil.$

U.S. Sector

Co-op Sector

6 May/June 1999 / Rural Cooperatives
Rural Cooperatives / May/June 1999 7

Calcot, Ltd.

Bakersfield, Calif.

Co-op type: Cotton and

almond marketing.

Geographical area served:

California and Arizona.

CEO/President: Tom W.

Smith, since 1977.

Facilities: Three locations:

headquarters and warehouses

in Bakersfield, and warehouses in Hanford, Calif., and

Glendale, Ariz. Capacity is

145 warehouses, or about 1.2

million bales of cotton.

Annual sales

revenue/product volume:

Yearly sales of $600 million

from a typical annual volume

of 1.3 million bales of cotton.

Number of members: 2,200

cotton — and 31 almond —

growers.

Number of employees: 104

full-time.

Largest markets: About 85

percent of Calcot’s cotton is

exported. In 1998, Calcot was

the largest shipper by volume

of all cotton marketed in the

U.S. Major cotton markets

include Japan, South Korea,

Taiwan, Indonesia and (some

years) China. In 1998, Calcot

exported to 39 countries,

including Ecuador, Italy,

Switzerland, Turkey, Mexico

and Brazil. Currently, the coop is developing new markets

in Latin America. Almond

markets are primarily European.

What’s new: After 62 years

of marketing strictly cotton,

Calcot expanded into almond

marketing this year. “This is

a historic moment for Calcot,”

says Smith. “Adding almonds

to our marketing functions is

a move that will propel us

into the future and allow us

to better maximize return to

producers of both crops.” Calcot does not plan to venture

into the retail snack foods

and consumer market. “Blue

Diamond Growers already

does an outstanding job in

that area,” Smith says.

Philosophy that drives

Calcot: “Our members count

on Calcot as an extension of

their own operations and we

believe we must always represent their best interests,”

Smith says. “That drives

everything we do.”

What’s unique about Calcot: “Our export focus and

desire to service customers’

needs,” says Smith. Calcot

owns its own warehouses,

unusual in the cotton industry, which allows the co-op to

ship its cotton bales exceptionally fast with maximum

service. “That also permits

growers to keep more of the

value of their production and

is one of the ways we can add

value to the process,” he adds.

Biggest changes taking

place? The U.S. cotton industry is experiencing a period of

relatively low prices and lower profits. The net effect has

been a reduction in acreage,

particularly for California

growers. “It has caused us to

re-examine our core values,

mission and practices, which,

in the long run, is a good

thing,” Smith says. In the

meantime, dealing with lower

volume has necessitated some

changes, such as adding

almonds, and closing and selling a couple of facilities Calcot no longer operates.

How is Calcot making a

difference for its members?

“We will continue to develop

new technologies and practices and control our warehousing facilities,” Smith

says. “We can run a very lean

operation, make the most of

our marketing opportunities

and maximize returns to

growers.” Calcot remains

active in industry affairs and

the legislative process, “since

government programs and

policy are today a very large

part of farming,” Smith says.

Plans to keep viable in the

21st century: Beyond Calcot’s

diversification into almonds,

the co-op will continue to

work on the challenges that

face its membership. These

include timing of sales, developing dependable markets,

delivering exceptional customer service, working with

legislators to build fair and

better governmental policy

and programs, and improving

overall demand and thus raising consumption of members’

cotton. “There really aren’t

any new challenges in our

business,” Smith says. “There

are just more of the old ones,

all at the same time.” ■

A CLOSER LOOK AT...

Calcot president Tom W. Smith is leading the co-op from a 72-

year tradition of marketing only cotton to handling almonds as

well. Photos by Catherine Merlo
8 May/June 1999 / Rural Cooperatives

Catherine Merlo

Editor

Minnesota pork producer Dennis

Timmerman will not soon forget the fall of 1998.

Like thousands of hog producers across

the nation, Timmerman found himself in

the middle of “an economic disaster,” “a crisis” and “a national emergency.” Late last

year, hog prices across the United States

plunged to their lowest levels in nearly 60

years. By December, hog prices to farmers

had dropped to as low as 8 cents a pound,

a 70-percent dive from year-earlier levels.

The break-even price for most hog farmers is about 38 cents a pound.

“It’s the worst year by far I’ve ever

seen,” says Timmerman, whose 150-sow

farrow-to-finish farm is located near Boyd,

Minn. “We can’t begin to service any financial requirements, and we’ve lost a lot of

equity. One of my neighbors who has a

small hog operation told me he received

$97,000 less income in 1998 than he had

the previous year.”

John Adams, a North Carolina pork

producer, concurs. “In the last year, many

hog producers have lost what they worked

a lifetime to gain,” Adams says.

The 1998 hog market crisis followed

two years of historically high prices, and

caught many producers blind sided. By

the spring of 1999, the situation had begun

to ease, with prices rebounding closer to

the break-even point. Yet industry analysts, producers, trade groups and professors continue to analyze the hog industry’s

price collapse. They cite multiple reasons

for the crisis. Chief among them, many

agree, has been that hog supplies have far

exceeded the slaughter capacity of U.S.

packing plants.

In reality, however, over-supply wasn’t

the root problem, insist some producer representatives. Although the National Pork

Producers Council (NPPC) board of directors agreed in November that farmers

were producing too many hogs for the

existing slaughter capacity in the United

States, it believed the source of the industry’s troubles lay elsewhere.

“It is not that we are producing too

much pork,” NPPC’s board told producers

in an open letter. “Domestic consumer

demand and exports are actually up significantly compared to 1997.”

The real problem, the board said, is that,

“producers have lost bargaining power.”

Missouri pork producer and Farmland

member Jim Phillips (right), his 

son Martin Phillips (center) and Martin’s

son Nathan Phillips got some relief 

from the hog crisis late last year when

Farmland, for the first time, set a 

floor price for live hogs. Photo by Jim Barcus,

Kansas City Star

Hogging The Market

For many farmers, the hog-price crisis confirms their shrinking

control of agriculture. Can co-ops help producers survive the age of

corporate farming?
Loss of bargaining power

From pork, poultry and cattle production to other farm businesses, such as grain

and soybeans, farmers worry they are losing control of agriculture. Many say industry control now lies in the hands of huge

corporate entities, which have the size and

financial backing to control everything

from production to processing to the allimportant market access. In farmers’

minds, American agriculture, with its

entrepreneurial heritage, is now vulnerable to the dictates of global conglomerates.

“Farmers complain today that they

have little leverage, little say, little control,” writes Dr. Joe Coffey, in the March

1999 issue of Cooperative Farmer, a Southern States Cooperative publication. Coffey

is a retired vice president of economics and

strategic initiatives for Southern States,

based in Richmond, Va.

Indeed, many segments of agriculture

are moving from the family farm tradition

to the vertical integration and contracting

system adopted by large global agribusinesses. These huge players, some financed

by Wall Street, have gone whole hog into

agricultural production and marketing,

prompting critics to say the U.S. marketing structure has become too concentrated, with control of the food chain in too few

hands.

The “poultry-ization”of the swine

industry

The hog business, in particular, has

recently — and rapidly — shifted to corporate, industrialized production. Like the

poultry industry before it, the swine business is undergoing major structural

changes that involve corporate ownership,

vertical integration, total confinement

housing and contracts with farmers. Large

corporate entities such as Murphy Family Farms, Iowa Beef Processing, the Swift

& Co. unit of Con Agra Inc., Smithfield

Foods and Cargill’s Excel now dominate

the hog business.

“Fifty (production entities) are now producing more than 50 percent of the hogs

in the U.S.,” says Gregory Beck, president

and CEO of Equity Cooperative Livestock

Association in Baraboo, Wis.

The shift has squeezed thousands of

independent family farmers out of the

business.

Pork producers who have remained in

the business have increasingly turned to

contract farming, where they own no hogs

but raise them on contract for a few large

corporations. In many states, it’s often the

only way farmers can afford to stay in the

ag business as tobacco and other traditional crops decline or face uncertain

futures.

Contracts not only take the opportunity out of farming, but some say they force

a farmer into servitude, forcing the farmer

into a minimum wage worker. And contractors can pull a contract.

Independent producers have found it

increasingly difficult to raise hogs as economically as the corporate “hog factories”

or large-scale confinement operations that

hold thousands of hogs. Unlike the swine

conglomerates, few farmers have the financial strength to survive the kind of market downturn the hog industry has recently experienced. And few independents can

compete with the corporate giants in the

marketing arena.

“It’s becoming more and more difficult

every day to maintain a live cash market,”

says Beck. “You’ve got more hogs tied up

in vertical integration and fewer hogs

traded on the open market.”

Looking for survival

Faced with the industry’s growing corporate domination, many family farmers

are seeking ways to keep their independence and ensure their survival. Efforts

are underway across the Hog Belt to help

farmers compete and increase their market access. Realizing they must look

beyond production expertise, many farmers

are banding together to expand into processing, packing or marketing — where

Rural Cooperatives / March/April 1999 9

Minnesota governor Jesse Ventura

salutes Prairie

Farmers Cooperative

Recent efforts by Prairie Farmers

Cooperative to gain more market

access for independent pork producers may not have reached as many

farmers as Farmland has, but they

have earned the accolades of

Minnesota’s new governor, Jesse

Ventura. In his State of the State

address to the Minnesota Legislature

in March 1998, Ventura drew attention to the efforts of Lyle Haroldson,

who organized the new cooperative

so that area pork producers could

become self-sufficient.

“Today, as we celebrate that the

State of the State is great, let us celebrate five people who are reforming

Minnesota for the better every day

through their good works,” Ventura

said. “They are here today to receive

the first Governor’s Awards for a

Better Minnesota.”

Ventura told Haroldson, who was

seated in the gallery, to rise and be

recognized. “With prices at crisis

lows,” Ventura said, “Lyle helped 80

Minnesota farm families rally under a

vision of building a hog processing

facility near Dawson. The major

emphasis will be on value-added

items that satisfy a consumer market.

When this project is done, there will

be 45 new jobs and great promise for

a better future for 80 farm families.”

Prairie Farmers’ plant could be

completed late this year.
the biggest profit margins lie.

In fact, what may have galled independent pork producers most in the past year

is that while prices they received fell to historic lows, packers and retailers profited.

That has spurred hog farmers to look more

closely at value-added operations for new

streams of income. Many feel that if farmers can own the entire chain, they too can

capture the margins beyond the farm gate.

Farmer-owned and controlled co-ops

may be the answer to helping producers

position themselves for survival. Several

cooperative efforts have emerged, not only

to help independent producers weather the

current hog crisis but to help them gain

more market access.

Today, co-ops — both old and new —

are taking closer looks at ways to help

their members compete and survive. Many

are focusing on increased volume, niche

markets and delivering quality products.

Others have set live-hog price floors or

hiked up their promotional efforts at the

retail level. All are seeking to increase

farmers’ share of profits in the hog-pork

industry chain.

Minnesota efforts

One effort that has drawn accolades

from no less than Minnesota Governor

Jesse Ventura [see sidebar] is Prairie

Farmers Cooperative of Boyd, Minn. Born

one evening in 1995 when 47 pork producers gathered to discuss how they might

increase market access, Prairie Farmers

is on its way to building its own small pork

processing plant. “We’re now in the financing stages,”says Board Chairman Dennis

Timmerman.

The Dawson-based facility will slaughter hogs and prepare the meat into premium products. While Prairie Farmers Coop has not yet developed a label or product

name, it will promote itself as a producer of

high-quality, wholesome food directly from

small farmers.

“Prairie Farmers is an opportunity for

producers to band together to build a small

operation to gain access to niche markets

that aren’t currently being served,” Timmerman says. “Among natural foods, the

10 May/June 1999 / Rural Cooperatives

Members of Farmland Industries benefitted from their co-ops’ bold moves to stabilize hog prices. Photo Courtesy Farmland

Industries
most rapidly growing section is in meat.

People are concerned about quality and

drugs or additives.”

Timmerman believes co-ops and direct

marketing programs are the way for producers to survive. But he acknowledges

that cash-strapped farmers have trouble

raising equity for new ventures. He also

recognizes the difficulty of generating

enough volume to access the market. Still,

he believes there must be a place for smaller, independent producers.

“I believe in a widely diversified system

of agriculture that provides a better food

source for the nation,” Timmerman says. “I

also know that the really large producers

who raise livestock in concentrated conditions run into waste disposal and contamination problems. And I can’t believe that if

an industry is controlled by one large segment of industry, prices will stay cheap.

“It’s a critical time in the history of agriculture,” Timmerman adds. “If there is no

change, a lot of us are going to have to exit

the industry.”

Farmland steps in

Farmland Industries, one of the nation’s

largest farmer-owned cooperatives, also

has taken steps in the past year to bring

relief to its pork-producing members. They

are among the more than 600,000 independent family farmers Farmland repreRural Cooperatives / March/April 1999 11

A crisis unfolds

“The nation’s pork producers are experiencing an economic disaster,” Donna Reifschneider, an Illinois pork producer and president of the National Pork Producers

Council (NPPC), wrote to President Clinton last November.

“Most pork producers are currently losing $50 to $75 per

hog sold.

“We believe the economic crisis facing America’s pork

producers must be viewed as a national emergency, warranting immediate intervention by the government,”

Reifschneider noted.

The crisis Reifschneider wrote of began, in part, in 1997,

when many slaughterhouses closed down as hog supplies

exceeded the nation’s packing plant slaughter capacity. At

least 37,000 head of daily hog slaughter was lost due to the

closures of four packing plants -- an Iowa Beef Processing

plant in Iowa, South Dakota’s Dakota Pork, Georgia’s

Premium Pork and Thorn Apple Valley of Michigan. This

helped create a massive bottleneck in the industry and

drove prices to historic lows.

Dr. Joe Coffey, a retired vice president of economics and

strategic initiatives for Southern States, a Virginia-based

cooperative, cites at least 10 causes for the recent price collapse of the hog market. They were, Coffey wrote in the

March 1999 issue of the co-op’s Cooperative Farmer magazine: “the unexpected increase in hog marketings; the closure of pork processing plants; the environmental permit

limits on hog kills; the flood of hogs from Canada due to

strikes and a weak currency; cheap corn and mild weather

that hiked hog weights to record highs; the moratoria on

expansion of swine facilities that caused a frenetic building

boom to beat the ban; the long string of profitable production months that persuaded producers and their lenders

that the hog cycle had crumbled and collapsed; the large

supplies of competing meats; the economic crisis in Asia and

Russia; and the slowness of the federal government to act.”

According to Al Tank, CEO of the NPCC, the crisis cause

could be simply stated. “Hog production is up 10 percent,

slaughter capacity is down 8 percent, and Canadian live

hog imports to the U.S. are up 37 percent,” Tank noted in

early January 1999.

The crisis was not due to poor pork demand, Tank said.

“Pork demand has been good this past year,” he said. “Retail

consumer demand is 7.1 percent higher than a year ago,

even though average retail pork prices have remained

about the same. The average American consumed an estimated 5 pounds more pork in 1998 than in 1997.

“Moreover,” Tank added, “pork was the only meat protein

to register any significant increase in domestic consumption during the year.

“The crisis is not a pork issue,” Tank insisted. “It is a live

hog issue.”

In fact, USDA had estimated that pork producers were

receiving about $144 million less per week on average than

they did during the previous five years. Moreover, their

share of the consumer’s dollar spent on pork had fallen to

an all-time low, despite strong prices at the supermarket.

For example, in September 1998, producers received a

record low 21 percent of pork retail prices, compared to

their normal share of 37 percent. Retailers’ share rose to 60

percent, compared to their usual 47 percent. Packers’ average take was 19 percent of the average retail price, fairly

close to their normal 16 percent.

NPPC has pushed packers to increase plant efficiencies,

pay overtime, add second shifts and even operate on weekends to increase capacity. NPPC believes the industry must

increase its 2-million-head slaughter capacity, and has prevailed on the federal government to raise its limits. The

organization has asked packers to increase their slaughter

capacity. It also has encouraged packers and retailers to

narrow their margins to more reasonable levels.
sents, either through direct memberships

for livestock producers or locally owned

cooperatives. One of the largest independent businesses in the pork industry,

Farmland owns several livestock processing and packing facilities, including four

pork slaughtering plants in Nebraska, Illinois and Iowa and nine further-processing

locations.

In December 1998, when live hog prices

fell to $8 to $10 per hundredweight, Farmland did something it had never done

before — it set a floor price for live hogs.

“Farmland agreed to pay our producers

no less than $15 per 100 pounds (live

weight) for hogs that met our weight and

quality specifications,” says Gary Evans,

executive vice president and chief operating officer of Farmland’s Meats Group.

The price-floor idea stemmed from

ideas offered by the co-op’s farmer-members during Farmland’s annual meeting in

Kansas City, Mo., earlier that month.

Farmland typically buys hogs at competitive prices, markets pork products under

the Farmland brand and then pays out its

profits to livestock producers and local coops in the form of patronage refunds.

“We recognize that a price floor is not

the total solution,” Evans says, “but we

believe it helped change the direction in

which the price of live hogs was moving.

Establishing a price floor was an essential

step to help our farmer-members through

one of the toughest economic periods in the

history of the pork industry. We felt compelled to help producers contain their losses until we could work through the oversupply of hogs.”

Another step Farmland took to help

move hogs through the market was to significantly increase its plant operating levels. Starting in August, Farmland bumped

up operating levels among its packing and

processing facilities to as high as 120 percent over previous-year levels. At the same

time, it increased plant operations to six

days a week.

“That moved an additional 70,000 to

100,000 head each month,” says Evans.

At the consumer and retail level, Farmland has worked to stimulate consumer

demand for pork by increasing advertising of its products, offering coupons, running specials on pork, and urging retail

and food service businesses to feature pork

and pork products. To meet changing consumer demand, Farmland also is working

to develop new value-added and leaner

pork products.

Farmland also has taken steps to help

producers market their hogs more effectively. In October, Farmland and the National Pork Producers Council launched a voluntary, hog-price reporting service on the

Internet. This reports the plant price

received on cash sales on the previous marketing day. The Web-based service

(www.farmland.com) reports the plant price

received on cash sales on the previous marketing day as well as other quality factors.

“The expanded information helps producers make better informed marketing

decisions,” says Evans.

Additionally, Farmland has asked Congress to help livestock producers and agriculture by aggressively pursuing marketand trade-expanding initiatives, granting

negotiating authority, renewing normal

trade relations with China and reforming

sanctions and embargo policies.

Pork production in America climbed 10

percent in 1998, to 19 billion pounds, topping the previous record set in 1995 by 7

percent. Photo courtesy Equity Livestock

Exchange

12 May/June 1999 / Rural Cooperatives
Rural Cooperatives / May/June 1999 13

“Our intention is to help producers

weather this economic storm,” Evans says.

“If we succeed in doing that, we’ve done

our job as a producer-owned company.”

Price risk management

Equity Livestock Co-op has begun

developing programs that can help its

members with price risk management in

the hog market. The co-op has 60,000

members in the Upper Midwest and markets $500 million worth of livestock annually. Its marketing volume includes

250,000 hogs each year.

Equity Livestock has added a licensed

commodity broker to help make direct

arrangements with packers. It’s also working to open more doors for price-risk management for its members through the

futures market.

“We’re seeing a huge interest from producers in these programs,” says Beck.

“Today, it’s not just an option but a necessity to eliminate price risk.”

Beck adds, “Co-ops need to help producers band together for better economic

clout in the marketplace.”

Producers form co-ops

In Kentucky, a small group of hog producers who saw opportunity formed their

own cooperative in 1992. Today, Central

Kentucky Hog Marketing Association

(CKHMA) counts 30 members who market 30,000 hogs per year through the cooperative. CKHMA pools shipments of hogs

for its members. The hogs are purchased

by Swift’s, the Louisville packer, which

seeks consistently high-quality hogs from

CKMHA. Members are saving on shipping

costs, benefiting from packer incentives for

hog quality and obtaining other services

offered by the co-op.

In North Carolina, the nation’s No. 2

hog-producing state behind Iowa, a group

of independent farmers has formed Eastern Foods, Inc. to increase the marketing

alternatives for its 70 members. It’s also

assisting members with purchasing inputs.

“It’s a challenge for individuals in the

hog business today,” says John Adams, an

Eastern Foods member who produces

6,000 hogs a year in Greene County, N.C.

“Producers must come together in size and

scope to compete.”

Eastern Foods is looking at a number

of possibilities, some of which involve packing opportunities. The co-op has even considered “moving to branded products to

assure consumers of the integrity of our

products,” says Adams.

Lessons for the future

While there are no quick and easy cures

to hog producers’ problems, there is hope.

For starters, USDA projects that inventories will decline in 1999 and the rate of

production increase will slow.

Following pleas to state and federal officials, proposals have emerged for government assistance for hog farmers. A federal

mandatory price reporting proposal also

is being discussed. “That’s important,” says

Equity Co-op’s Beck. “That will help level

up the playing field for independent producers.”

But beyond the short term, farmers are

learning from the harsh lesson of the

recent crisis that they must band together.

Through farmer-owned and controlled

cooperatives, producers can increase their

bargaining power, access helpful market

information and stay in the game.

Many industry observers say farmers

need to stop thinking that they only produce commodities. They say producers

must stop thinking of live hogs, and start

thinking of more value from bacon and

ham. With pork producers still reeling from

the recent price disaster, there may be no

better time to re-examine the cooperative

principle that by working together, farmers

can position themselves to survive. ■

The total inventory of all hogs and pigs in

the United States on March 1, 1999, was

59.9 million head, about 1 percent lower

than in March 1998. Photo courtesy Equity

Livestock Exchange
“A visionary, a moderator

and a statesman, who has

done much to advance the

influence and effect of coops in the United States

and in the world.”

Involvement with cooperatives:

Stanley W. Dreyer spent 45 years

directly involved in cooperatives

before retiring in January 1999 as an

officer of the National Cooperative

Bank (NCB) in Washington, D.C. During that time, he devoted his business

and personal energies to organizing,

developing and promoting co-ops

everywhere. His roles have included

president of the Cooperative League

of the United States (now the National Cooperative Business Association),

board member of the International

Cooperative Alliance, and international cooperative developer at NCB.

Dreyer also was the founder of the

Cooperative Hall of Fame, into which

he himself was inducted in 1997. The

ceremony at the National Press Club

honored him with these words,

“Throughout his tremendous career

with cooperatives, Dreyer has been a

visionary, a moderator and a statesman, who quietly but effectively has

done much to advance the influence

and effect of co-ops in the United

States and in the world.”

Career achievements: Dreyer

counts his role in creating NCB as

one of his greatest accomplishments.

Congress chartered NCB in 1978 to

provide financial services to commercial and real estate ventures that are

guided by cooperative principles. In

1981, NCB was restructured as a privately held financial institution. It is

owned today by more than 800 member-users. “Stan was instrumental in

the formation of the bank,” says NCB

president Chuck Snyder.

Says Dreyer, “NCB’s creation was

a coalition building effort. It’s been a

force in non-agricultural co-op growth

and it’s been supportive of the cooperative community in general.”

Dreyer also takes pride in his

efforts to facilitate cooperative development abroad and to help bring

cooperatives together.

Latest honor: To recognize Dreyer’s contributions, lifelong beliefs and

support of cooperatives, NCB this

year created “The Spirit of Cooperation Award.” A medallion, cast with

Dreyer’s image, will be awarded annually to an NCB employee who exhibits

Dreyer’s cooperative spirit. “Stan is a

senior statesman of the co-op community,” says Snyder. “His dedication

to the spirit of cooperation is one of

the ideals we try to promote with

NCB.” On April 22, 1999, NCB managing director Barry Silver received

the first-ever award.

What new developments are taking place within cooperative community? “The most striking area of

new cooperative formation has been

in retailer-owned purchasing cooperatives,” Dreyer says. He also points to

innovative programs in senior housing and healthcare, and education

and cooperative approaches to the living wage.

Biggest co-op concerns? “The

limited cooperation among cooperatives, which underutilizes their potential influence and effectiveness,”

Dreyer says. He’s also concerned

about the limited appreciation of the

value of and need for an informed

membership and employees on the

values of cooperatives. He advocates

more attention to understanding why

application of time-tested principles

adds strength to the entire system.

Future for cooperatives? “I see a

broader based cooperative system

with new cooperatives being formed

among non-agricultural groups to preserve their ability to stay in business

or to pursue the need for services,”

says Dreyer. He also expects to see

larger and more diverse co-ops to

meet competition and to continue to

be an effective yardstick for their

members. “There will also be a growing adaptation to international markets and conditions,” he says.

Personal future plans? “I plan to

find satisfaction and rewards in more

personal things such as family, reading and a simpler but active life,”

Dreyer says. “I had nearly 50 years to

make whatever contribution I could

to the cooperative movement and it

has been very kind and generous in

return.” ■

14 March/April 1999 / Rural Cooperatives

IN THE SPOTLIGHT

Stanley W. Dreyer

cooperative statesman

Stan Dreyer’s image is cast in a new

“Spirit of Cooperation” medallion, which

the National Cooperative Bank will award

annually. Photo by Catherine Merlo
Catherine Merlo

Editor

As Fred Kuenstler settles

into his first year as board

president of Prairie Farms

Dairy, he’s finding the transition to

be as smooth as a drink of the cooperative’s chocolate milk.

That should come as no surprise. After

all, this dairy farmer has been a member of

the cooperative’s board for 31 years, and

its treasurer for the past 11 years.

Furthermore, his predecessor, Melvin

Schweizer, is only a seat or two away, having remained on the Prairie Farms board

after 26 years as its chairman.

But if one thing makes Kuenstler’s job

easy, it’s the very cooperative he is charged

with leading. Prairie Farms Dairy is considered one of the most successful dairy

cooperatives in the United States. Based

in Carlinville, Ill., the 800-member co-op

is recognized across the Midwest for its

high-quality dairy products. From its humble beginnings in 1938, Prairie Farms has

grown to become one of the nation’s top

five fluid milk bottlers, and, until recently, held a place on the Fortune 500 list of

American companies.

In the often dissenting dairy industry,

there’s a general agreement that Prairie

Farms knows how to operate efficiently

and profitably, says Ed Coughlin, senior

policy advisor for the National Milk Producers Federation.

“Prairie Farms has a unique ability to

run a very profitable operation in bottling

fluid milk,” Coughlin says. “Most other

cooperatives haven’t had the success that

Prairie Farms has had in that endeavor.”

From his farm in Olney, Ill., where he

milks 120 cows and grows grain on 1,000

acres, Kuenstler offers his answer for

Prairie Farms’ success.

“What makes Prairie Farms unique is

that its management and board have

always been interested in making a profit,

and returning that profit back to the producers,” says Kuenstler, who was elected

board president in late January.

And that’s just what Prairie Farms did

once again last year. Celebrating its “sixtieth and best year ever,” Prairie Farms

achieved record earnings and sales. For its

fiscal year ended Sept. 30, 1998, Prairie

Farms reported all-time high earnings of

slightly more than $50 million, an increase

of 13.5 percent over the previous year. Dollar sales also made history at $933 million,

a whopping $50 million over the year before.

(Those figures don’t include Prairie

Farms’ lucrative business with its five

joint-venture partners. Those partnerships

brought in more than $685 million in sales

in 1998, an increase of nearly 4 percent

from 1997.)

And more high-water marks are expected.

“When I took over 12 years ago, I told

the board and management that Prairie

Rural Cooperatives / March/April 1999 15

The Prime of Prairie Farms Dairy

With its focus on earnings and its profitable track record, this

Midwest dairy co-op has producers asking to become members 

Although its largest product is fluid milk,

Prairie Farms also churns out ice cream,

cottage cheese, sour cream and yogurt.

Photos courtesy of Prairie Farms.
Farms would reach $1 billion in sales in

the year 2000,” says Leonard Southwell,

the co-op’s executive vice president and

CEO. “But it’s possible we’ll do that in

1999.”

Growth through acquisitions

Early members of Prairie Farms might

hardly recognize their co-op today. Organized originally as Producers Creamery of

Carlinville, it was later renamed Prairie

Farms Creamery of Carlinville. Today, after

more than 50 mergers, consolidations and

acquisitions, it’s Prairie Farms Dairy Inc.

“When we put Prairie Farms Dairy Inc.

together in 1962, our total yearly sales

were about $16 million,” Southwell says.

“In the last 10 years, our growth has been

about $500 million.”

Southwell attributes much of the co-op’s

growth to its acquisitions. On its own,

Prairie Farms operates 17 plants and 36

distribution centers, and employs 2,100 people in eight Midwest states. But add in its

five joint ventures and the numbers soar.

Today, Prairie Farms, its subsidiaries

and joint ventures operate 30 plants, three

warehouses and 68 distribution points for

a total of 101 profit centers. You can find

them in Illinois, Indiana, Missouri, Iowa,

Kentucky,Tennessee, Michigan, Ohio, Oklahoma, Arkansas, Nebraska, and Kansas.

All counted, there are 4,300 employees

who add value to 3.8 billion pounds of raw

milk each year. For Prairie Farms last year,

the co-op’s Grade A producer-members

supplied about 75 percent of the needed

volume. The rest was purchased from other co-ops, which also shared in the patronage earnings.

All together, Prairie Farms partners

and subsidiaries help the co-op produce a

complete line of dairy products. Their

largest use of raw milk — 80 percent — is

for fluid bottled milk, equaling more than

3.35 billion pounds of milk. Other products

include 30 million gallons of ice cream per

year, 63 million pounds of cottage cheese

(or some 7 percent of the nation’s output),

30 million gallons of sour cream and dips,

and 7 million pounds of yogurt. Orange

juice and other non-dairy drinks total 46

million gallons per year.

Why orange juice? “Many customers

only want to do business with one dairy,”

Southwell says. “Orange juice processing

is compatible with milk processing.”

Its diversified line of products accounts

for a large part of the co-op’s strength,

according to Kuenstler. “Prairie Farms has

long taken producers’ milk and turned it

into a product that can be marketed for

added income,” he says. “We were into value-added long before it became a buzzword.”

Capable management leads to

loyalty

Kuenstler also believes Prairie Farms’

success stems from its capable management team. Throughout its history, Prairie

Farms has benefited from a small but

capable team of managers who have navigated the company on its profit-making

course. It started with Fletcher Gourley,

the visionary pioneer who helped create

the co-op in 1938.

“There is no doubt he was the guiding

light behind much of the success of Prairie

Farms,” Southwell says. And there was

Schweizer, under whose 26-year guidance

the co-op saw tremendous growth.

“Prairie Farms has the best managers

in the dairy industry,” Kuenstler says.

“They’re completely dedicated. I can call

Leonard Southwell on a Saturday morning, and he’ll be there in the office, not out

on the golf course. And the management

team is like that, all the way down the line.”

Southwell has been Prairie Farms’

manager since 1988. For years, he served

as the co-op’s No. 2 man behind the legendary Gourley. But Southwell has been

connected with Prairie Farms since 1951,

when he managed a small Illinois co-op

that later merged with Prairie Farms.

“Prairie Farms has been successful

because we have avoided making any catastrophic mistakes,” says Southwell. “We

don’t shoot from the hip.We put a great deal

of time and effort into any program we

embark upon. If it’s not going to do anything

for the producers, we’re not interested.”

That may be why so few members have

left the co-op. “I could count on one hand

the number of members who’ve quit and

gone somewhere else,” Kuenstler says.

“That should give you some idea of the loyalty members have toward Prairie Farms.”

In fact, the co-op’s blue-ribbon reputation is so strong, “there are producers in

all areas where we procure raw milk who

are asking to join Prairie Farms,” says

Southwell. But asking doesn’t always lead

to membership. “Prairie Farms is not a coop that invites all producers in,” says

16 March/April 1999 / Rural Cooperatives

Including subsidiaries and joint ventures,

Prairie Farms operates 30 plants, three

warehouses and 68 distribution points

across the Midwest.

Prairie Farms member Merritt Fitschen

(second from right), seen here with his

sons and grandson, has won numerous

milk quality awards. He began milking in

1939 with three cows.
NMPF’s Coughlin.

Says Southwell, “We don’t want surplus

milk.We take on members only as we need

them. We pay top prices for quality milk

because our products must be top quality.

We’re selective in taking on new producers.”

For the producers who are fortunate

enough to be members, the rewards are

high. Their pay price, quality and patronage averaged $16.70 cents per hundredweight in 1998 — 80 cents above the previous fiscal year. Prairie Farms saw not

only historic earnings in 1998 but a record

patronage of $28 million as well. Sixty percent of the patronage payment — or $1.37

per hundredweight — was made in cash

June 1 of this year. In the past five years

alone, Prairie Farms has paid out more

than $110 million in patronage dividends.

“By law, a cooperative must pay at least

20 percent of patronage dollars in cash,”

Prairie Farms notes in its 1998 annual

report. “Prairie Farms has paid out at least

50 percent for the past 15 years.”

In addition, Prairie Farms operates on

a 7-year basis in paying back allocated

earnings. It considers this “a remarkable

accomplishment” for the dollars involved.

“We know of no other cooperative, strictly

in dairy, that has returned to the producers

the amount of money per hundredweight

on their milk than has Prairie Farms,” the

annual report says.

One other strong pull for member loyalty is the black-ink basis on which the coop operates. There is no debt. There is no

check-off for capita retains or stock. “This

co-op is financed strictly on earnings,”

Southwell says.“We currently have no money borrowed from banking institutions.”

For 1999, Prairie Farms’ capital expenditure budget totals $14 million. That’s

down noticeably from $17 million last year,

when the co-op began building an ultrahigh-temperature processing plant in

Granite City, Ill. The $8 million plant will

produce the co-op’s soft-serve ice cream

mix, half-pints of milk for vending companies, 5-gallon milk dispensers, and halfand-half cream for Prairie Farms’ retail

sales. It will begin operations in June 1999.

Prairie Farms keeps its operations as

cost-effective as possible. Its management

staff is small.“You’d be amazed at the small

size of our corporate office when you look

at the size of our sales,” Southwell says.

In more than two dozen rural communities in several Midwest states, the bestpaying jobs can be found at the Prairie

Farms dairy plant. Much of the co-op’s success is due to the “Prairie Farms family,”

says Southwell. “We work as a team from

plant to plant. Very seldom do our employees leave our employment. Many work

beyond the retirement age.”

Southwell also stresses that plant managers are given major responsibility for

their operations. “We don’t try to call the

shots from the corporate office,” he says.

“They’re responsible for the bottom line.”

Not ready for a merger

So far, Prairie Farms has not considered a merger with mega-cooperatives.

That isn’t to say that Prairie Farms won’t

work with the dairy giants. Already, it has

three joint ventures with DFA. Land

O’Lakes is one of Prairie Farms’ members,

as are Foremost Farms USA and Associated Milk Producers Inc.

Prairie Farms is closely watching the

industry’s formidable challenges — a

changing customer base, the declining role

of government, maintaining per-capita consumption of dairy products, and the ongoing struggle to remain competitive. It won’t

be an easy road. Prices, which reached alltime highs of about $19 per hundredweight

in January, are dropping. “It would be

unrealistic to believe that the coming year,

1999, would be as successful as 1998,” the

co-op’s annual report says.

But as this little giant in the dairy

industry moves ahead, it will continue the

strategy that has worked so well for so long.

In August 1998, it acquired the Roelof

Dairy at Galesburg, Mich. In January 1999,

Prairie Farms acquired another company,

Holland Dairy of Holland, Ind. More acquisitions remain a possibility. “We’re always

interested in pursuing acquisitions that fit

with Prairie Farms,” says Southwell.

Kuenstler himself has given thought to

how the relatively small Prairie Farms will

survive in the world of mega-mergers and

dairy giants. “But when I look at Prairie

Farms’ management, our diversification

and our quality,” he says, “I know our

future is great.” ■

Rural Cooperatives / May/June 1999 17

A new, 1,500 gallon milk tank is pushed

inside the milk barn at the Merritt

Fitschen dairy in central Illinois.

Subsidiaries and

joint ventures

As part of its operations, Prairie

Farms has several wholly- owned

subsidiaries and joint ventures. One

subsidiary, Ice Cream Specialties,

manufactures and distributes all

types of frozen treats, many with the

popular North Star brand. Ice Cream

Specialties has operating divisions in

St. Louis, Mo., and Lafayette, Ind.

PFD Supply is a non-dairy subsidiary operation. As a one-stop distributor of products to fast-food outlets, PFD Supply has more than

170,000 square feet of refrigerated

warehouses in Granite City and

Lebanon, Ill. It delivers more than 7

million cases of products each year

throughout the Midwest.

Another subsidiary, Pevely Dairy,

was founded in 1887. The Pevely

name became renowned for quality

dairy products with the 1904 St.

Louis World’s Fair, and has since

remained a market leader. Its distribution points are located in St.

Charles and St. Clair, Mo.

East Side Jersey Dairy, its fourth

subsidiary, is a fluid-milk operation

in Anderson, Ill.

Prairie Farms’ members also are

half-owners of five joint venture companies.
18 May/June 1999 / Rural Cooperatives

Donald A. Frederick

Program Leader/Law, Policy & Governance

USDA Rural Business-Cooperative Service

Fur Breeders Agricultural Cooperative supplies feed to breeders of

fur bearing animals. It has delivery routes that serve areas with a high

concentration of members. The co-op

delivers feed to these members free of

charge. Other members must pick up

their feed at the co-op’s facility.

Two of the cooperative’s members,

whose ranch is approximately 80 miles

from the nearest delivery route, sued the

cooperative. They asked for an injunction

requiring the cooperative to deliver feed

to them, claiming that the policy of delivering feed free of charge to some members but not to others constituted price

discrimination in violation of Section 2(a)

of the Clayton Act (as amended by the

Robinson-Patman Act). They also asked

for triple damages based on lost profits,

litigation costs, and attorney’s fees under

Section 4 of the Clayton Antitrust Act.

The cooperative asked the court to dismiss the litigation on the grounds that the

plaintiffs’ claims, even if true, didn’t allege

anything illegal. A United States District

Court Judge in Utah denied the co-op’s

motion,holding that the delivery policy could

be found to be unlawful price discrimination

and a violation of antitrust law entitling

plaintiffs to triple damages and costs. Bell v.

Fur Breeders Agricultural Cooperative, 3 F.

Supp. 2d 1241 (D. Utah 1998).

Robinson-Patman primer

Federal antitrust and trade regulation

laws do not give the government authority to tell a business what prices to charge,

but they do forbid discrimination among

buyers in those prices, under certain conditions. One element of those laws,

Section 2(a) of the Clayton Act as amended

by the Robinson-Patman Act, makes it

unlawful for a seller “to discriminate in

prices between different purchasers” of the

same products “where the effect of such

discrimination may be to substantially

lessen competition....” 15 U.S.C. ‘ 13(a).

The intent of Section 2(a) is to prevent

large buyers from using their market

power to purchase goods at lower costs

than their smaller competitors. Nonetheless, the legal onus is placed on sellers.

Charging a lower price to some buyers

is allowed in some situations, such as to

meet an equally low price offered by a

competitor or where the difference in

price can be justified by differences in the

costs of serving customers. Fortunately

for our purposes, these complex defense

issues aren’t involved in the case covered

in this article.

The Robinson-Patman Act has not

been a major restraint on cooperatives.

The Act specifically provides that paying

patronage refunds to members and other

patrons is not price discrimination. 15

U.S.C. ‘ 13(b). However, this decision is a

reminder that cooperatives are not totally exempt from Robinson-Patman.

Robinson-Patman Act issues

The court first discussed whether the

cooperative’s delivery practices could affect

the “price” members paid for feed. It found

that “price” encompassed more than the

invoice price. “Price” was de-fined as also

including other terms of sale that allowed

some customers to purchase something at

a lower overall cost than other customers.

The court determined that the additional

cost incurred by the plaintiffs in picking up

their feed could amount to illegal indirect

price discrimination.

Next the court looked at whether the

cooperative’s delivery policy might result

in a substantial reduction in competition.

The court observed that since fur is sold

at auction, the cooperative’s practice

could not result in a lower price for the

plaintiff’s products.

However, it said plaintiffs could establish that the discrimination resulted in

lower profits for themselves. The court

noted that fur breeders operate on a relatively low profit margin and the cooperative’s delivery policy provided plaintiffs’

competitors with a significant competitive advantage. This, in the court’s mind,

was enough to justify an inference of competitive injury.

While the opinion addresses this issue

in vague terms, a footnote is more to the

point. Here the judge states, “It seems

obvious to the court that plaintiffs’ competitive opportunities may be harmed

when it is forced to incur $16-17,000 dollars in costs to pick up feed that its competitors have delivered at no cost. This is

clearly the type of competitive injury the

Robinson-Patman Act was designed to

discourage and prevent.”

Thus the judge rejected the cooperative’s motion to dismiss the RobinsonPatman Act charges.

Antitrust issue

Finally, the court addressed plaintiffs’

charge that the cooperative’s delivery policy also violates federal antitrust law,

subjecting the co-op to triple damage liability. It reviewed the charges in plaintiffs’ compliant and stated that since it

was ruling on the cooperative’s motion to

dismiss, it had to construe all allegations

in the case in favor of the other party—in

this instance the disgruntled member

plaintiffs.

The court concluded that where, as in

this dispute, a cooperative’s conduct

increases the costs of some customers

and those customers can’t raise their

prices to recover the cost differences

between themselves and other competitors receiving the same product at a

lower cost, the harm to the disadvantaged customers is something the

antitrust laws are designed to prevent.

The cooperative’s motion to dismiss the

antitrust allegations was also denied.

Implications for cooperatives

While this case involves a dispute

between a cooperative and some of its

members, it raises a broader issue. Other

than paying patronage refunds what, if

anything, can a supply cooperative offer

its customers as inducements to become

members? Is every member-only discount or service a possible RobinsonPatman and antitrust laws violation? 

As for the charges of antitrust law violations, perhaps they will resurrect interest in whether the Capper-Volstead Act

defense to anticompetitive conduct by

agricultural producers covers providing

supplies to producers. Certainly any

issue that poses the possibility of tripledamage awards against cooperatives

requires consideration of all possible

defenses. ■

Supply Co-op Faces RobinsonPatman Act and Antitrust Liability

LEGAL CORNER
Rural Cooperatives / May/June 1999 19

Tracey L. Kennedy

Ag Economist, USDA Rural Development

Editor’s note: The first in an annual series

of surveys of cooperative involvement in

international markets began in 1997. Prior

to that, cooperative exports and imports

had been measured at five-year intervals.

The new survey was also the first attempt

to measure cooperative involvement in

activities other than exporting and importing. These include foreign memberships

and ownership of assets in other countries. An overview of survey findings for

1997 is presented here.

Co-ops set record for exports in 1997

Riding brisk sales in pre-recession Asian

markets and sharp increases in sales of

bulk commodities, U.S. producer-owned

cooperatives reported record agricultural

exports in 1997. During 1997, 95 cooperatives reported exports of agricultural

commodities and food products valued at

more than $7.8 billion, up from $5.6 billion in 1995 and accounting for more

than 13 percent of all U.S. agricultural

exports. Seven cooperatives also reported

exports of non-agricultural products —

fishery and seafood products, fertilizer

and other farm inputs, equipment and

machinery — valued at $227 million.

Seventy percent ($5.48 billion) of

cooperative exports in 1997 were bulk

commodities: grains and oilseeds, cotton,

pulses, and peanuts (figure 1). Consumer-oriented products — fresh and

processed fruits and vegetables, red

meats and poultry, dairy products, and

tree nuts —accounted for 25 percent

($1.98 billion). Intermediate products —

partially processed or intended for use

by other than the final consumer — such

as feeds, oils, flours and meals, and sugars and sweeteners, accounted for about

5 percent ($406 million) of the total.

While trends in U.S. exports point to the

increased importance of differentiated products relative to bulk commodities, cooperatives have shown growth in both categories

during the latter half of the 1990s (figure

2). Fueled by consolidations and alliances

in grains and oilseeds, cooperative exports

of bulk commodities posted a sharp increase

of 43 percent from $3.8 billion in 1995. Similarly, sales of consumer-oriented products,

which remained relatively steady during

the first half of the 1990s, rose 39 percent

from 1995 to 1997, largely on the strength

of increased sales of horticultural products.

Intermediate products sales continued their

consistent increase, rising 15 percent from

1995 to 1997.

Export sales concentrated among

largest co-ops

Cooperative export sales continue to be

heavily concentrated among a few large

exporters. In 1997, only five cooperatives,

each with exports of greater than $250 million, accounted for 76.7 percent of all

export sales reported, roughly the same

amount reported in 1995. Another 16 percent, or $1.3 billion, came from 14 cooperatives having export sales ranging from

$50 million to $249 million. The largest

number of cooperatives in any sales range

was 34, selling between $1 million and $9.9

million but accounting for less than 2 percent of all export sales.

Record cooperative share

Cooperatives accounted for 13.8 percent

of all U.S. agricultural exports in 1997, the

largest cooperative share recorded since

cooperative exports have been surveyed by

USDA. Sharply higher levels of cooperative exports, coupled with a downturn in

total U.S. export sales, are primarily

responsible for this increase. In terms of

commodity categories, cooperatives posted a 23.3 percent share of U.S. bulk

exports, 9.5 percent of all U.S. consumeroriented exports and 3.2 percent of intermediate export sales.

Export markets

Asian markets were by far the most

important for cooperative exports in 1997,

taking in $3.9 billion or 49.7 percent of the

total, compared to 43 percent of all U.S.

exports to those destinations (figure 3).

European destinations followed with $1.39

billion or 17.7 percent of cooperative

exports, while Latin American markets took

in $796 million or a little more than 10 percent. Canada accounted for almost 9 percent of cooperative exports at $684 million.

Non-agricultural exports

Seven cooperatives reported non-agricultural exports valued at $227 million in

1997. Non-agricultural products consist

mainly of farm inputs such as fertilizer,

petroleum products, equipment and other

supplies, and forestry products as well as

seafood and fisheries products.

Ninety percent of these exports ($204.7

million) are comprised of fertilizer, petroleum and chemical products (figure 4).

Nine percent ($20.5 million) comes from

other products, primarily fisheries and

seafood products, forestry products and

some services. Machinery and equipment

($1.2 million) and miscellaneous farm supplies — mainly fencing and animal health

products ($890,000) — account for less

than 1 percent, respectively.

Canada was by far the leading market

for cooperative exports of non-agricultural

products at more than $202.8 million, or 89

percent of the total. Asia was the second

largest market at $15.2 million, or 7 percent of the total, followed by Europe at $6.1

million, or 2.6 percent, and Latin America

with $2.7 million, or about 1 percent.

Export tools

A variety of tools are available to cooperatives to facilitate the sale of member

product overseas. These include GSM

loans; Foreign Sales Corporations (FSCs),

a tax incentive mechanism for U.S.

exporters; export trade Certificates of

Transworld Traders

With 1997’s record exports, U.S. farm cooperatives 

prove their ability in the global marketplace
20 May/June 1999 / Rural Cooperatives

Review (COR), a provision providing limited antitrust exemptions for joint export

activities; and export promotion programs

such as USDA’s Market Access Program

(MAP) or those available through various

state and regional organizations.

On the surface, survey results indicate

that only a relatively few cooperative

exporters make use of these programs: 14

of 95 reported using FSCs; three participate in the COR program; 13 have received

MAP funds; nine use GSM loans, and 13

participate in state, regional, or commodity-based export promotion programs. However, some of these programs are limited

to specific commodities and countries, and

virtually all are geared to exporters of a

certain size and continuity in terms of market presence. The survey did not attempt to

measure cooperative awareness of these

programs.

Cooperatives import range of

goods 

Cooperatives source products from

around the globe for a variety of purposes. Farm supply cooperatives purchase fertilizer, petroleum, feed, animal health products, twine, and equipment and machinery

to provide member-producers with the best

value in farm inputs. Marketing cooperatives import ingredients for further processing, complementary products to

enhance their product lines and occasionally to augment member production.

In 1997, 24 cooperatives reported more

than $507 million in imports. Seventy-two

percent of cooperatives’ imports were farm

supplies and other agricultural inputs such

as petroleum, fertilizer, and machinery and

equipment (figure 5). Twenty-three percent of cooperatives’ imports were of highvalue food products, primarily fresh produce and juice concentrates. The remaining

5 percent consisted of intermediate agricultural products: feed components, sugars and sweeteners, and bovine semen.

Countries of origin

U.S. cooperatives purchased more than

61 percent of their imported goods from

NAFTA partner Canada in 1997 (figure 6).

Most of the Canada-sourced products consisted of farm inputs such as fertilizer, petroleum products, and other farm supplies.

Latin American countries originated 22

percent of cooperatives’ imports in 1997,

consisting mainly of fresh and processed

fruits and vegetables, as well as some farm

supplies. Europe provided 7 percent of the

total: processed fruit products, farm supplies and machinery, and frozen bovine

semen. The origin of 9 percent of imports

was not identified, while Asia, the Middle

East and Oceania (Australia, New

Zealand) provided less than 1 percent of

imported products.

Figure 1— Agricultural Exports by

Cooperatives, 1997

Total Exports: $7.88 billion

Figure 2— Agricultural Exports by U.S.

Cooperatives, 1990 – 1997

1990 1995 1997

Figure 3— 1997 Cooperatives Exports by

Destination

8,000

7,000

6,000

5,000

4,000

3,000

2,000

1,000

0 1990 1995 1997

Bulk

Commodities

70%

Asia

49.7%

Europe

17.7%

Canada

8.7%

Unidentified 5%

Middle

East

3%

Africa

5.2% Oceania

0.7%

Latin 

America

10.1%

Consumer

Products

25%

Intermediate

Products 5%

$ million

Total

Bulk

Consumer Oriented

Intermediate
Rural Cooperatives / May/June 1999 21

Beyond exporting and importing

In the past, cooperative involvement in

international activities has largely been

limited to exporting and importing, though

a few engaged in manufacturing, brand

licensing and the like. Although still relatively few, an increasing number of cooperatives within the last decade have

evolved into more truly international companies through a variety of other involvements in world markets. Today, cooperatives increasingly seek foreign producer

members, engage in joint manufacturing

or distribution with foreign firms, and seek

out partnership and investment opportunities abroad. Marketing cooperatives facilitate the sale of member products and

enhance the visibility and value of member-owned assets such as brand-names

through licensing and distribution

arrangements. Farm supply co-ops have

increasingly integrated back into primary

production through foreign member cooperatives or the acquisition of foreign assets.

In 1997, six cooperatives reported having producer-members in other countries,

most in Canada, Mexico and South America. Five cooperatives had member cooperatives outside the United States, primarily in Canada. A majority of the co-ops

with foreign producer-members are

engaged in the production of consumer-oriented products, while those with foreign

co-op members are producers of bulk commodities and farm inputs.

Twelve cooperatives — primarily producers of consumer-oriented products —

reported licensing arrangements. Most of

these cooperatives were active in multiple

markets if not worldwide.

Six cooperatives reported joint processing or manufacturing arrangement

overseas. Most were active in multiple locations, with the heaviest concentrations in

Europe and Asia. Though not asked to

specify whether these activities involved

contractual arrangements (such as copacking) or asset ownership, three coop

eratives reported ownership of assets in

those countries where they also had joint

processing activities.

Thirteen cooperatives reported ownership of foreign assets (excluding offices).

These assets ranged from wholly owned

processing and manufacturing facilities to

minority shares in other companies. Nine

cooperatives had assets in only a single

overseas location, while four reported

assets in multiple countries.

Cooperatives have demonstrated, year

by year, that they can be effective players

in a global marketplace and their 1997

results illustrate that. However, as 1997

drew to a close, many of the markets on

which U.S. cooperatives most depend experienced a sharp decline in economic conditions from which they still have not

recovered. This, coupled with the maturity

of markets for some commodities in which

cooperatives are basic, will continue to

challenge the cooperative presence internationally. ■

Figure 4— Nonagricultural Exports by

Cooperatives, 1997

Total Non-Ag Exports: $227.4 million

Figure 5— Imports by U.S. Cooperatives,

1997

Total Imports: $507.8 million

Figure 6— Cooperatives Imports by

Country of Origin, 1997

Fertilizer, Petroleum &

Chemicals

90%

High value

food products

23%

Canada

61%

Unidentified

9%

Nonagricultural

72%

Intermediate

5%

Latin

America

22%

Europe

7%

Other

1%

Other

9%

Farm Supplies 0.89%

Machinery

1.2%
22 May/June 1999 / Rural Cooperatives

By Valerie Berton 

Information Specialist USDA Sustainable

Agriculture Research and Education 

Editor’s Note: USDA’s Sustainable Agriculture Research and Education (SARE)

program has funded 1,400 grants since

1988 to help producers improve profits

and stewardship. As part of its educational focus, SARE recently helped launch a

“Farming for Profit, Stewardship & Community” campaign for small-scale producers. The campaign centers on “tip sheets”

listing free and low-cost resources on

subjects ranging from alternative marketing to improving soil to networking. To

learn more about SARE and how to apply

for a grant or to view SARE project

results, tip sheets for small farmers or other educational materials, see

www.sare.org

As beef prices spiraled downward like a Kansas twister

throughout the 1980s and early 1990s, ranchers in the Great Plains

began selling their spreads to agricultural

corporations and housing developers.

Watching some of the best grassland in the

world be subdivided for second homes, a

group of Kansas ranchers decided to take

action.

Thus was born the Tallgrass Prairie

Producers Co-op, ranchers who figured a

collective strategy had a better chance of

weathering the storm.

“Ranchers are very independent—we’re

not used to working together,” says Annie

Wilson, a co-founder of the Kansas beef

cooperative and its fledgling effort to obtain

better prices for sustainably raised beef.

But when struggling ranchers heard about

preliminary meetings of the group, “They

kept showing up.”

Today, Tallgrass Prairie Producers Coop consists of nine ranching families

throughout the state who produce beef on

grass and market it accordingly. They are

banking on the willingness of consumers

to pay for beef raised on a protein-rich

grass that has been the envy of other

ranchers for generations. Until the 1940s,

in fact, Texas ranchers used to truck their

cattle north to finish them on Kansas

grass.

Aided by a SARE grant, the co-op

worked with the Kansas Rural Center to

hire staff to create labels, coordinate production and, above all, market beef. They

now sell beef to a hospital, restaurants,

small groceries and directly to individuals.

At the ‘Buy Kansas’ Expo 1997, Tallgrass

Beef was voted best Kansas product.

“It’s a great effort by people trying to

live by their principles, and have their

product reflect that,” says Dan Nagengast

of the Kansas Rural Center. “There’s a big

striving in this country for ‘real’ things.

Pepperidge Farms will never be a farm,

but here’s a product that is what they say

it is.”

Most U.S. beef comes from cattle finished in feedlots, where they eat large

amounts of grain. By finishing beef on pasture, co-op members cut out the extra,

energy-intensive process of planting, harvesting and shipping grain. Instead, their

production model keeps land in grass, conserving soil and water quality. Their animals are raised without hormone implants

or antibiotics.

The resulting leaner cut of beef has

yielded impressive nutritional test results,

and, Tallgrass Beef producers boast, tastes

better. An average cut of Tallgrass beef

breaks down to 116 calories, 1.5 grams of

fat and 0.7 grams of saturated fat. Co-op

members feel sure once that information

gets out, their product will bring a better

price in the marketplace than conventionally raised beef.

“We’re trying to break out of the

corporate-industrial mold,” says Pete

Ferrell, a local rancher and the co-op’s secretary-treasurer. “We want to capture the

value of what we’re doing, to be price-makers rather than price-takers” in the fluctuating beef market.

The key, they say, is spreading the word,

finding the niches where they can sell their

different brand of beef. They attend conferences, workshops and trade shows, land

stories in the local press, write for newsletters and talk up their product to whoever

will hear them.

Their first customer was a local hospital, where the staff dietician was wowed

by the lower fat content of co-op beef. A

restaurant in Wichita specializing in lowfat food soon followed.

A Fight for Survival

Co-op members hope extra profits will help preserve a 

way of life they see rapidly disappearing on the prairie

Annie Wilson, rancher and business manager of th
Rural Cooperatives / May/June 1999 23

More recently, the co-op landed its first

out-of-state customer. A Baltimore trade

show brought co-op representatives in contact with a Hudson Valley, N.Y., distributor that supplies food clubs and natural

food stores in New York, Connecticut,

Pennsylvania and New Jersey.

“They called us as soon as we got home

and said they were ready to go,” says Wilson, the co-op’s business manager. The coop began shipping frozen beef from Kansas

in late 1997. The effort was not without

tough initial challenges. A severe drought

plagued Kansas just as the co-op got

underway, and cutting through what

seemed like yards of bureaucratic red tape

to establish a logo, business plan and marketing strategy tried their patience.

Yet, co-op members are heartened by

the potential of Tallgrass Prairie Producers

to reach consumers all over the country.

They hope the extra profit will help preserve a way of life they see rapidly disappearing on the prairie.

“Though our community life may be fulfilling and supportive, it belies the underlying economic crisis in this area, where

young ranchers are rare as thunderstorms

in winter,” Wilson wrote for The Land

Report, a Land Institute publication, in

1995. “The best that most young people

wanting to stay on the land can hope for

is to find a job as a manager or hand for

one of the absentee ‘mega-ranchers.’ I

grieve for their loss of a personal, longterm stake in the land—the bonding and

commitment that comes from knowing the

hills and grasses they manage are truly

their home[s] and must be preserved for

their children.” ■

the Tallgrass Prairie Producers Co-op, says co-op members are raising “healthy animals on healthy land.” USDA Photo by Vada Snider
Next century will see new wave of electric co-ops as

consumers seek protection from deregulation

Consumers will increasingly turn to cooperatives for energy services if the electric utility industry abandons its longheld obligation to serve all customers, predicts Glenn English,

chief executive officer of the National Rural Electric

Cooperative Association (NRECA).

Speaking to more than 12,000 representatives from the

nation’s cooperative electric utilities in Anaheim, Calif.,

March 8 for the 57th NRECA Annual Meeting, English singled out energy suppliers that have either threatened to or

have abandoned residential electric customers in states that

have allowed some form of electricity deregulation.

“Remember Enron? Today, that company has turned its back

on consumers in every residential market they entered,” he said.

Warning that the concept of choice can mean that some

consumers “won’t get chosen,” English read from an employee

newsletter published by an investor-owned power company

that promised to focus its resources on “those customers who

will give us the targeted rate of return. In a deregulated market, we shouldn’t try to keep all customers. After deregulation

is a reality we will no longer have an obligation to serve,” he

said, quoting an official of the power company.

“Companies like that help define who we are,” said

English, urging the delegates to strengthen their adherence

to the seven business principles that put the consumer at the

center of the cooperative enterprise. “Changes in our industry

will increase the need by consumers for electric cooperatives.

According to the cooperative principles, we have a responsibility to meet those needs,” he said.

English also warned of business and political forces at

work to undermine the cooperative business structure, calling

on cooperative officials and consumers to remind their elected

officials to recognize the uniqueness of electric cooperatives.

“There are forces at work whose goal is to eliminate competition by attacking the cooperative form of business,”

English said. “Legislators and regulators must tailor restructuring legislation in a way that preserves and keeps the cooperative business model whole. We are not asking to be

exempted. We are asking to be treated differently, because we

are different. We must have the ability to continue to provide

consumers with an alternative that allows them the opportunity of choice and self-determination.

NEWSLINE

Number of U.S. dairy farms plunges

The number of

dairy farms in the

U.S. has dropped by

more than one-fourth

in the past six years,

according to a new

analysis conducted

by the National Milk

Producers Federation

(NMPF).

NMPF reviewed

USDA data on the number of dairy farms in major dairy

states during the period 1993-98. During that 6-year period,

the total number of U.S. dairy operations dropped from

157,150 in 1993 to 116,430 in 1998 — a decline of 40,720

farms, or 25.9 percent. The USDA defines a dairy operation

as any farm with at least one milk cow during a given year.

The state losing the largest number of farms during this

period was Wisconsin (down 7,000 farms). Minnesota was

second with a loss of 3,800 farms, New York third with 2,300

fewer farms, Ohio fourth with 2,000 farms lost, and Texas

and Missouri tied for fifth with 1,800 less farms. NMPF’s

analysis did not examine the individual loss of dairy farms

in 16 of the 50 states that do not have significant dairy

industries, although these states together lost a total of

7,270 farms during 1993-98.

Measuring the decline in farm numbers as a percentage,

the NMPF analysis shows that many Western states have

lost a significant portion of their dairy farms, at rates higher

than in traditional dairying areas like the Midwest and

Northeast. For example, New Mexico lost 54.5 percent of its

farms between 1993 and 1998. Washington state was next

with a decline of 48 percent of its dairy operations. Arizona at

a loss of 37.5 percent, Texas at 36 percent and Utah at 35.7

percent, rounded out the five major states with the most

severe rate of decline in their dairy farm numbers.

California, which produces the most milk of any state in

the nation, lost 1,300 farms, or 32.5 percent, of its operations

during the 6-year period. The No. 2 dairy-producing state,

Wisconsin, lost 23.3 percent of its farms — a rate slightly

under the national average attrition rate of 25.9 percent. The

other largest-producing dairy states lost farms at close to or

below the national average attrition rate: No. 2 New York

down 20.9 percent, No. 4 Pennsylvania down 11.4 percent,

and No. 5 Minnesota down 28.1 percent.

Jerry Kozak, NMPF’s chief executive officer, said the

analysis “clearly illustrates the economic pressures on individual dairy farmers as our industry consolidates. Across the

country, milk is coming from fewer but larger farms. As dairy

producers continue to be exposed to volatile swings in the

market price for milk, we will continue to see dramatic drops

in the total number of farms in the U.S. — even in major

dairy states like California and Wisconsin.”

24 May/June 1999 / Rural Cooperatives
Rural Cooperatives / May/June 1999 25

“Together we will aggressively pursue the right of any electric cooperative to enter into any business that any other utility company is allowed to enter in a restructured electric utility industry. Legislative language addressing this specific

point must be a part of any overall restructuring measure we

support,” he said.

English praised the electric cooperative network’s bold

move in establishing the Touchstone EnergyR brand and its

standards for consumer protection and service. “Touchstone

Energy represents the integrity of the trust and the bond we

have with those we serve, and it is a significant contributor to

the new sense of unity developing within electric cooperatives,” he said.

English urged cooperative directors and staff to reaffirm

their commitment to consumers by rallying behind an

“Electric Consumer Bill of Rights,” which would declare, in

part, that all electric consumers are entitled to the right of

affordable electric power, of self-reliance, the right to economic

independence, to fair treatment, the right to ownership, the

right to additional services, and the right of cooperation.

Representatives from cooperative electric utilities across

the nation who attended the NRECA annual meeting, March

7-10, in Anaheim set NRECA’s legislative and organizational

agenda for 1999. In addition to considering and acting upon

policy resolutions, delegates received reports from NRECA

officials, heard addresses by key public figures and attended

panel sessions on major issues affecting electric cooperatives

and their consumer-owners.

NRECA is the national service organization that represents the nation’s nearly 1,000 consumer-owned electric cooperatives, which provide electric service to more than 32 million people in 46 states.

Dairy Farmers of America celebrates first annual

meeting in Kansas City

In a message outlining 1998’s accomplishments, Dairy

Farmers of America (DFA) president and chief executive

officer Gary Hanman told an audience of 1,700 members and

guests that DFA members can be proud of what they have

accomplished by working together.

Noting that 1998 was a year of record milk prices and a

period of restructuring and change for the cooperative,

Hanman said the year was challenging but rewarding for the

cooperative and its members. He noted that the year opened

with the Basic Formula Price (BFP) at $13.25 per hundredweight (cwt) and ended at a record high BFP of $17.34. The

average BFP for 1998 was $14.20 per cwt.

Hanman pointed out several DFA accomplishments. “We

set a goal of earning $70 million on total sales of $7 billion in

1998,” he said. ADFA completed the year with sales of $7.3 billion and a net margin of $70 million. DFA’s joint ventures performed very well, returning $41 million to the bottom line.”

Hanman also saluted DFA’s consolidated and restructured

manufacturing operations, its merged and restructured work

force, its recently created business alliance with Leprino

Foods, and the continuing expansion of its joint venture bottling operations. He also recognized DFA completed merger

with California Gold Cooperative Creamery, DFA’s marketing

strategy for Borden Cheese, and its successful pursuit of political initiatives.

Two eastern dairy co-ops merge

More than 95 percent of the voting members of Maryland

and Virginia Milk Producers Cooperative Association of

Reston, Va., and Carolina-Virginia Milk Producers Association

of Charlotte, N.C., have approved a merger of the two cooperatives. Effective April 1, the merger created a cooperative that

serves more than 1,550 dairy farmers in 11 eastern and southeastern states, from Pennsylvania to Alabama. It will market

about 3 billion pounds of milk a year. The newly merged operation has the Maryland and Virginia Milk Producers

Cooperative Association name. Headquarters are in Reston,

Va. A regional office is located in Charlotte, N.C.

Foremost Farms USA earns $27.4 million

Aided by strong markets and reduced costs, Foremost Farms

USA earned $27.4 million in net income from $1.38 billion in

total revenues for the year ended December 31, 1998.

In comparison, the Baraboo, Wis.-based dairy cooperative

earned $4.5 million in 1997 and had $1.19 billion in total revenues. In 1996, Foremost Farms earned $16.9 million in net

income and had $1.36 billion in total revenues.

“What was different about 1998 is the market didn’t have

multiple peaks and valleys like it did in 1997, when it took

two large dips,” said Duaine Kamenick, Foremost Farms’ vice

president of finance. “During the past year, the market made

a steady climb and never really fell.”

Foremost Farms president Donald C. Storhoff announced

that patronage allocation for 1998 averaged 53 cents per hundredweight on all member milk marketed during the year.

During those 12 months, members marketed 5.1 billion

pounds of milk.

As in prior years, Foremost Farms will pay 25 percent — this

year averaging 13 cents per hundredweight — to member-owners in cash. The remainder will take the form of equity credits.

Foremost Farms operates 27 manufacturing facilities and

three milk transfer stations for dairy farmers in Wisconsin,

Minnesota, Iowa, Illinois, Indiana, northwestern Ohio and

southern Michigan. The cooperative employesd 1,750 people

as of Dec. 31, 1998.

NEWSLINE
NICE conference set for July 26-29 in Utah

The 71st National Institute on Cooperative Education

(NICE) will be held July 26-29 at the Snowbird Resort in

Snowbird, Utah. The theme of the annual conference on cooperative education is “Achieving New Heights Through

Cooperatives.” The program will focus on the opportunities

cooperatives afford their members and the challenges farmers

and farmer-owned cooperatives face as they enter the new

millennium. The conference is sponsored by the National

Council of Farmer Cooperatives Education Foundation.

AMPI sets operational records in 1998

Associated Milk Producers Inc. (AMPI), the Midwest dairy

cooperative, announced record earnings and sales, and gains

in milk volume and membership, at its 30th annual meeting

March 23.

“In 1998, AMPI’s first year as a Midwest-based cooperative,

we realized record milk checks, earnings and return on equity

invested,” AMPI president Wayne Bok told 600 AMPI members and staff attending the annual business meeting.

AMPI reported earnings of $14.9 million on $1.1 billion in

dairy product sales. “This is the largest profit in the history of

AMPI,” said AMPI general manager Mark Furth. “But more

important, we gained a record number of members and paid a

record price to our member-owners.”

In 1998, AMPI processed 4.6 billion pounds from 5,000

dairy farms in several Upper Midwest states.

DFA forms joint venture with Madison Dairy

Kansas City-based Dairy Farmers of America (DFA) and

Madison Dairy Inc. of Madison, Wis. have agreed to form a

joint venture to produce and market butter and related products at DFA’s plant in Winnsboro, Texas.

DFA’s corporate board approved formation of the venture

during a March 24 meeting in Kansas City. Operational

agreements were expected to be completed by May 1, 1999.

Dr. Lonnie Spurgeon, chief operating officer for DFA’s Dairy

Foods Group, says the Winnsboro plant is ideally located to

serve the joint venture’s plans to increase butter sales.

“This area is producing increasing quantities of cream, which

are available to convert into high-quality butter,” Spurgeon says.

“This new business relationship will allow DFA and Madison

Dairies to expand services to many valued customers.”

CoBank board re-elects officers and adopts new

director election bylaws

CoBank’s board of directors in April re-elected Otis Molz as its

board chairman, and Wayne Martin and Roy Orton as officers.

Molz, CoBank board chairman since 1993, is a farmer and

rancher from Deerfield, Kan. Martin was re-elected as first

vice chairman — he is CEO of Plains Cooperative Oil Mill, a

cottonseed cooperative in Lubbock, Texas. Orton, a vineyard

owner and fruit tree grower from Ripley, N.Y., was re-elected

as second vice chairman. Orton is also past chairman and

director of Welch’s Foods of Concord, Mass. Orton and Martin

have held their vice-chairman positions since 1997.

As a customer-owned bank, CoBank is governed by a 22-

member board of directors. Customer-stockholders elect 21 of

the directors, and an additional director is elected by the

board as an outside director. Also, CoBank’s board adopted

several new bylaws affecting director eligibility. An age limitation was added requiring directors to be under the age of 70

on or prior to the date the term of office is to begin. Residency

requirements were modified. Formerly the bylaws required

director candidates to reside in the CoBank district or region

for two years before running — this requirement was changed

to require the director to reside in the district or region as of

July 1 of the election year. In addition, a requirement for U.S.

citizenship was eliminated.

While two-thirds of the directors are farmers, producers,

growers or commercial fishermen, the board also includes

rural utility managers and directors, agricultural co-op leaders and commercial banking experts.

“CoBank’s board members reflect the bank’s customer

base,” Molz explains. “Our directors bring diverse backgrounds, expertise and industry knowledge to the boardroom.

Eliminating the requirement for U.S. citizenship reflects the

international scope of our business. And easing district and

region residency requirements acknowledges that directors

represent all stockholders rather than a particular geographic

area or industry.”

Under the CoBank board structure, seven of the director positions are elected for three-year terms by stockholders each year.

Nominations for expiring terms for elected positions are accepted

in the summer of each year for a 60-day period. Nomination ballots were sent to eligible voting stockholders in May.

In other news, CoBank invites U.S. agricultural cooperative leaders to attend its 1999 Customer Meeting in

Nashville, Tenn., on July 7-8. With the theme “Building on a

Decade of Accomplishment: Leading Rural America in the

21st Century,” the meeting will cover issues of interest to the

bank’s 2,100 customers, which include U.S. agricultural cooperatives, rural utilities, Farm Credit associations and other

businesses serving rural America. The bank also provides

export financing for the benefit of U.S. agricultural cooperatives and American agriculture.

Michigan Milk Producers votes to remain on its own

After a thorough evaluation of combining operations with

Dairy Farmers of America (DFA), the board of the Michigan

26 May/June 1999 / Rural Cooperatives

NEWSLINE
Rural Cooperatives / May/June 1999 27

Milk Producers Association (MMPA) has voted to keep the coop as its own milk marketing entity. While the MMPA board

found many similar characteristics with DFA, including marketing philosophies and cooperative principles, the board

determined it would be in the MMPA members’ best interest

to remain on its own at this time.

NCBA members inaugurate a new NCBA at 1999

Cooperative Conference

National Cooperative Business Association (NCBA) Paul

Hazen introduced “the new NCBA” at the 1999 Cooperative

Conference April 21-23 in Washington, D.C. The meeting featured the theme, “Moving Cooperation into the 21st Century.”

The conference included the annual meetings of the

Cooperative Development Foundation, the National

Cooperative Bank and NCBA. In his remarks, Hazen discussed NCBA’s Strategic Plan for 1999-2004. “As we enter the

21st century, NCBA’s 20-year goal is to make cooperative

enterprise a strong, distinct and unified sector of the economy

recognized by the U.S public.”

Hazen detailed NCBA’s four strategic initiatives for the next

five years: Cooperative Education, International Cooperative

Development, Cooperative Public Policy and Cooperative

Business Development. “By focusing on these strategic initiatives, NCBA ensures that cooperatives are the better way to do

business as we move into the 21st century,” he said.

Most electric utilities will be ready ahead of schedule

for Year 2000 date roll-over 

The nation’s electric utilities show substantial progress in

their Year 2000 (Y2k) readiness efforts, and most will be ready

well in advance of the Y2k date rollover.

According to the latest assessment ending March 31, 1999,

by the North American Electric Reliability Council (NERC),

millennium-related date problems in most of the electric utility industry will be tested and fixed by June 30, 1999. In a

report delivered April 30 to the U.S. Department of Energy,

NERC expressed continued confidence that the lights would

remain on come Jan. 1, 2000.

Electric utility trade associations, including the National

Rural Electric Cooperative Association (NRECA), continue to

help gather data from their member utilities for the quarterly

reports to DOE, which the federal agency requested last year.

NRECA’s latest survey of the 858 electric cooperatives in that

sector of the industry showed that 646, or 82 percent, of the

794 electric cooperatives responding expected to complete

their readiness work by June 30. The remaining 18 percent

reported that work to keep the lights on would be complete on

or before Dec. 31, 1999.

Reasons electric cooperatives gave for achieving readiness

after June 30 included availability of computer software and

other outside vendor upgrades after the June goal.

Different from the two previous quarterly surveys were

questions included by NRECA to determine if its member

cooperatives were having resource problems in achieving Year

2000 readiness. Only eight cooperative electric systems indicated some problem with resources to fix the Y2k problem, but

all eight expected controls that keep the lights on to be ready

by Dec. 31, 1999-Jan. 1, 2000, according to Ron Greenhalgh,

NRECA chief engineer and chairman of the association’s Year

2000 Task Group.

“The survey data show that cooperative electric utilities,

large and small, rural and not-so-rural, are on schedule with

remediation of the Y2k problem,” said Greenhalgh.

The NERC report also showed that fewer than 3 percent of

all components tested for the Year 2000 problem had required

Y2k fixes; errors that had appeared had been mostly cosmetic

or nuisance-type errors, such as incorrect dates in logs. “In

nearly all instances, Y2k does not affect functions that keep

the lights on in homes or businesses,” NERC said.

Electric distribution systems may be “least sensitive to Y2k

anomalies,” according to NERC, because most equipment is

mechanical, meaning there are relatively few digital controls

and relatively few embedded chips.

Greenhalgh echoed this observation, adding, “Electric cooperatives, most of which are distribution-only utilities, have

been working continuously with their power suppliers, regulators, grid operators, vendors and manufacturers to identify

real and potential problems, test and fix critical systems, and

then ensure their contingency plans are in place.

“We’ve been in the reliability business for more than 60

years and under the toughest conditions in the business. We

expect to deliver the same reliable service in the year 2000

that we deliver now,” he said.

Cenex/Land O’Lakes Agronomy Company to purchase

Terra distribution business

Cenex/Land O’Lakes Agronomy Company has agreed to

purchase the distribution business of Terra Industries Inc.,

Sioux City, Iowa.

The purchase will include Terra’s approximately 400 farm

supply retail facilities, seed and chemical distribution and

other related businesses, employing more than 2,600 people

in 31 states and Canada. The purchase also includes Terra’s

portion of ownership in the Omnium chemical formulation

plants in St. Joseph, Mo., and Blytheville, Ark.

The agreement does not include purchase of Terra’s nitrogen manufacturing facilities.

“This opportunity to purchase Terra’s distribution business

enhances our total cooperative agriculture supply business,”

NEWSLINE
said Al Giese, president, Cenex/Land O’Lakes Agronomy

Company. “We’re continually looking for ways to improve efficiency as we source and supply products and services to farmers through local cooperatives. Our regional cooperative’s agronomy business growth and profitability depend on increasing volume and maximizing our distribution and service capabilities.”

Specifically, the acquisition of Terra’s distribution business

would bring the Agronomy Company and the regional cooperative system an additional $1 billion in crop protection product

sales, 2.5 million tons of plant food business, and over $100

million in seed sales. The transaction is expected to be finalized by mid-summer. Giese says farmers currently doing business with Terra should not experience operational changes.

Isom named Co-op Farmer of the Year 

Howard Isom, Blue

Diamond Growers’ board

chairman, has been named

Co-op Farmer of the Year

by the Agricultural Council

of California. The award

was presented at the association’s annual meeting in

March.

A long-time member of

Blue Diamond, Isom has

served on the board since

1988 and as chairman

since 1991. He is also a

member of Sunsweet

Growers and Diamond Walnut Growers. During Isom’s tenure,

Blue Diamond has made major strides in increased efficiency,

membership growth, new product development, grower services, leadership development, and technological change. His

prominence in agriculture and business led to his election to

the board of directors of CoBank in 1998.

In addition to managing 1,400 acres of almonds and serving as a partner in Matsom and Isom Accountancy Corp.,

Isom serves on the California State University, Chico, School

of Business Advisory Council, the Research Institute Board,

and on the Superior Ag Board for the School of Agriculture. In

1988, he received the Business Person of the Year Award from

the university. He has received numerous other awards and

recognitions for his service to local colleges and organizations,

and is a member of the board of directors of North State

National Bank.

Agway announces unification of its agriculture and

retail businesses

Agway Inc., an agriucltural cooperativer owned by 75,000

Northeast farmers, announced in April that it is combining its

agricultural products and retail services businesses. Robert A.

Fischer, Jr. of Milford, Del., has been named president of the

new agriculture and retail group. Fischer previously served as

president of Agway Agricultural Products.

“The unification of our agriculture and retail businesses

will allow us to better leverage our talent in serving the

needs of our existing customers and winning new customers,”

said Fischer. “Both businesses share many of the same customers and are dealing with similar marketplace changes.”

Agway’s agriculture business operates through six geographically based enterprises within 12 Northeast states. The enterprises manufacture and distribute dairy and livestock feed, seed

and agronomic products and services, and operate 58 farm supply stores. The enterprises also produce many Agway-branded

products that are distributed through more than 100 companyowned retail stores and more than 300 dealers in the Northeast

states. The combined agriculture and retail business, which

accounts for about one-half of Agway’s annual sales and revenues, will be managed through the six enterprises.

Under the unification plan, Agway’s River Valley

Enterprise, headquartered in E. Syracuse, N.Y., will provide

overall leadership for the combined group’s advertising, procurement, operations, customer service and dealer relations

functions. Agway’s Keystone Enterprise, headquartered in

Shippensburg, Pa., will manage these functions, in collaboration with River Valley, for the agriculture and retail group’s

southern territory.

Also as part of the unification plan, Agway’s Western New

York Enterprise, based in Batavia, N.Y., will be responsible for

expanding the company’s coordinated dairy systems activities

across enterprise boundaries and providing technical leadership to ensure that Agway is a leading dairy foods company.

Agway’s Southeast Enterprise, headquartered in Milford, Del.,

will lead efforts in the agronomic sector to ensure that Agway

remains a leader in nutrients, nutrient management and related information technology. Each enterprise will oversee retail

dealer relations and store management within its territory.

The unification plan includes a workforce reduction of

approximately 40 positions or 2 percent of the combined agriculture & retail group’s current workforce of 2,158 employees.

Agway added that it will move forward with a planned consolidation of its Salina Meadows office facility in Syracuse, N.Y.,

into Agway’s corporate headquarters location in DeWitt, N.Y.

Cattle marketing joint venture becomes reality: Blue

Grass Marketing Systems of Kentucky and Southern

States

Blue Grass Marketing Systems of Kentucky, the livestock

marketing joint venture bringing together Eugene Barber &

28 May/June 1999 / Rural Cooperatives

NEWSLINE

Howard Isom
Sons, S&B Cattle Co. and the MLE Marketing Division of

Southern States Cooperative, has become a reality.

The Bluegrass Stockyards in Lexington and MLE’s yards

at Irvington, Owenton and Paris will all operate as part of the

new enterprise, according to Tom Reed, the Southern States

vice president who heads livestock marketing. “This will give

the state’s beef cattle producers access to the broadest possible scope of marketing opportunities,” he said.

“We believe that this has the potential of becoming the

biggest news to hit the feeder cattle industry in the last

decade,” says Gene Barber, one of the partners and a past

president of the National Livestock Marketing Association.

Bourbon Stock Yards in Louisville closed after its March

29 sale, Reed noted. But he added that the new venture offers

several viable alternatives to growers who had been taking

animals to the historic Louisville yard.

At Irvington, the yard now offers a 1 p.m. Sunday drop-off,

followed by a Monday sale. Thursday sales continue at both

Irvington and Paris. In addition, there are Wednesday sales at

Owenton and sales each Monday, Tuesday and Wednesday at

Lexington.

MLE Marketing’s Indianapolis yard will begin conducting

a special feeder calf sale on the last Friday of each month.

This event is in addition to the Tuesday sales regularly scheduled at that yard.

Reed noted that beef cattle producers should be aware of

two other recent developments. MLE is currently pursuing

the development of an auction facility in southern Indiana in

partnership with Indiana Farm Bureau. It is also expanding

its recently developed backgrounding and feeder calf procurement system, which allows farmers to gain added value by

producing for a specific market.

The MLE chief said many of the changes have resulted

from “literally hundreds” of suggestions from cattlemen in the

area. Most came as a result of a December letter asking them

how they believed MLE could best serve them.

Reed said Barber & Sons and S&B are Kentucky’s oldest

feeder cattle procurement firms, highly respected among cattle

ranchers. Their joint venture with MLE Marketing creates the

largest marketing organization of its kind in the country. ■

NEWSLINE

Kansas Honors First Co-op Hall of Fame Inductees

Five prominent cooperators have been inducted into the

new Kansas Cooperative Hall of Fame sponsored by the

Kansas Cooperative Council. Joe Lieber, executive vice president, said the five inductees honored at the council’s recent

annual meeting had promoted cooperative businesses during

their careers. Cited were:

U.S. Sen. Arthur Capper, owner and publisher of the

Topeka Daily Capital, founder of the Capper Foundation for

Crippled Children, former governor, and a five-term senator

who cosponsored the Capper-Volstead Act signed by President

Warren Harding in 1922. The cooperative education and

research center at Kansas State University was named after

him in 1984.

Henry L. Peterson, a credit union pioneer who helped

organize more than 200 credit unions in four States including

Kansas plus the forerunner of the Kansas Credit Union

Association and served as its president from 1945-54. He also

founded the Credit Union of Dodge City in 1940.

Gene W. Porter, a farmer from Viola, Kans., who became

known as Mr. Rural Electric Cooperative for his 23 years as

president of the Sedgwick County Electric Cooperative

Association, 19 years on the board of Kansas Electric

Cooperatives, and service on the board of National Rural

Electric Cooperative Association including a term as president. He helped establish the Rural Electric Conference

Center at the Agricultural Hall of Fame at Bonner Springs,

Kans.; chaired the advisory board of the Wichita Bank for

Cooperatives, and helped established several marketing and

farm supply cooperatives.

Clayton R. Rock was secretary-treasurer and general

manager of Kansas Farmers Service Association (KFSA) for

32 years until his retirement in 1979. KFSA provides auditing, accounting and insurance services for its member cooperatives and was one of the first companies to offer computerized data processing services to cooperatives in the 1960s. He

was president of the National Society of Accountants for

Cooperatives and was honored by them for his distinguished

services to cooperatives.

Ivan Strickler, a progressive dairy farmer from Iola,

Kan., gained recognition as national dairy and international

good will ambassador for the dairy industry. He served several terms as elected president of Mid-America Dairymen, led it

through a series of mergers and consolidations that made it

the nation’s largest dairy marketer, and helped pave the way

for its eventual consolidation with other dairy cooperatives to

form Dairy Farmers of America. He chaired the National

Dairy Promotion and Research Board; served on the executive

committee of the National Milk Producers Federation; was a

frequent delegate to world agricultural trade talks; served as

president and director of the National Holstein Association;

earned a reputation internationally as a skilled cattle judge;

and was past president of the World Dairy Shrine. He

authored a book, “Holy Cow—We Did It!,” which traced the

evolution of dairy cooperatives and his leadership role in the

dairy industry.

Rural Cooperatives / May/June 1999 29
30 May/June 1999 / Rural Cooperatives

Donna F. Abernathy

DLF Communications Services

Editor’s note: Abernathy, a freelance writer based in Murfreesboro, Tenn., has broad experience working for and with cooperatives.

It was a time of crisis. In 1933, the country’s devastating

economics hit with full force the once-thriving Concord

grape growing and processing industries. Demand for premium quality grape juice gave way to the necessity for basic food

staples. Vineyards were abandoned. Weeds were growing where

grapes should have been. Plants and equipment fell into disrepair. Poor yields and even poorer processor prices were reflected

in the faces of dispirited growers.

From this bleak period emerged the future of the Welch Grape

Juice Company (now Welch Foods Inc.) and its ultimate cooperative ties. It came in the unlikely form of successful New York

businessman, Jack M. Kaplan, who, by his own admission, started out just looking for a way to make some money. But what history records is his influence on Concord grape growers and how

he inspired one of the most significant events in the annals of

the fruit juice industry.

Seizing opportunity

Kaplan, an astute businessman, viewed the grape juice industry’s woes as an opportunity. In 1933, he purchased a small,

financially strapped grape processing plant in Brocton, N.Y., and

organized it into the National Grape Corporation. Though he

had no knowledge of the grape juice business, Kaplan had all

the ingredients of success: the capital needed to revitalize the

local grape-growing industry, business experience to compete

with established competitors and a solid management team.

Grapes for his operation were supplied by the five small growers’ cooperatives, from which he had purchased the plant, and

also by North East Fruit Growers. He knew from his experience

in the molasses business that success hinged on developing a close

relationship with the growers.

By buying exclusively from

these six groups, Kaplan saw an

opportunity to upgrade the financial status of the growers. He

insisted on, and got, a five-year

contract guaranteeing grape

deliveries of 5,000 tons a year,

2,000 more than the cooperative

had produced in any previous

year. The agreement gave growers the incentive they needed to revitalize their industry.

The businessman’s ideas worked. In seven years, the Brocton

facility had doubled in size and the growers were receiving

increased prices for their grapes.

Then came World War II and commodity price ceilings. Private

processors like National Grape were forced to compete with cooperatives that were exempted from the price controls. When growers began forming or joining small cooperatives, Kaplan quickly voiced his opinion that they were “crazy to form all these little

co-operatives.” To make his point, he made a most unusual offer.

If the growers would form one big cooperative, he would sell the

very profitable Brocton plant to the newly created farm organization.

The National Grape Co-operative Association was soon in

business, but buying the processing plant from Kaplan took a

little longer than planned. Only two months after signing the

agreement to purchase National Grape in 1945, a circumstance

occurred which held even greater promise for the growers.

A cooperative destiny

The Welch Grape Juice Company was for sale. And Jack

Kaplan wanted it.

He knew the new owner of the company would have “the only

nationally advertised name” in grape juice. As Kaplan explained:

“What Ivory was to soap, Welch was to grape juice.” In addition

to the well-publicized brand, the deal would deliver an established market along with production and distribution facilities in

five states.

Once again, Kaplan saw opportunity and he encouraged the

new co-op members to support him. It meant the co-op would

forego the purchase of the Brocton plant and instead concentrate on eventually buying Welch from Kaplan. It would take

PAGE FROM THE PAST

From Corporation to Cooperative

One man’s dream becomes Welch’s legacy

Jack Kaplan

In the early 1900s, the Welch Grape Juice Co. funded

aggressive promotional campaigns that established it as a

household name. Photo and artwork courtesy welch Foods Inc.
more than a decade for the

deal to be finalized, but

Kaplan remained unwavering in his conviction that “in

the end the only viable form

of ownership of this business

was ownership by the farmers through the cooperative.”

Kaplan bought controlling

interest in the Welch Grape Juice Company and quickly reversed

negative trends in the sluggish business. By 1949, he was ready

to sell to the growers, but three years would pass before an

acceptable plan was presented. The five-year plan called for

Welch to accept the growers grapes, process them, manufacture

and market the products, and give the farmers the full net proceeds that would accrue towards the $15 million purchase price

for the company’s land, buildings and equipment.

The plan was a generous one by many accounts. Still, there

was fierce opposition from some growers. One argument that

emerged was the belief that farmers should stick with growing

grapes and leave the processing, manufacturing and selling to

private industry. Bigotry also emerged as a theme since some

distrusted Kaplan because of his Jewish heritage. Despite these

arguments, the growers approved the plan by the end of 1952.

In three years, the growers amassed their $15 million and

made a deal with Kaplan to finance the additional $13.5 million

needed to buy Welch’s current assets and good will. On September 1, 1956, at 11:31 a.m., with a vote of the directors, National Grape Cooperative Association, Inc. became the sole owner of

Welch Grape Juice Company Inc.

To govern the new business relationship, a two-board system

was established by the cooperative. National’s board of directors

would concern themselves with delivering grapes, while Welch’s

board concentrated on converting the fruit into marketable products and selling them. Today, this unique arrangement continues

and serves as a model for other cooperative ventures.

A dream fulfilled

In selling Welch, Kaplan realized his initial goal of personal

profit, netting about $13 million. But turning Welch into a materially successful company and transforming it into a cooperative gave him an even greater personal satisfaction, Kaplan told

William Chazanof (author of a history of Welch’s) in a series of

interviews about his experiences in the grape juice industry.

During his years as a businessman, Kaplan became deeply

concerned about how people were exploiting one another. “We

have never been able to get together to have a system by which

we are all cooperating for the common good,” he said. Also, his

years of friendship with the growers gave him the ability to

understand the unequal position of the individual farmer in

dealing with processors. As Chazanof noted: “To Jack, the sale

of Welch to National was both a personal and philosophic triumph. In a sense, it was Jack Kaplan’s enduring monument

toward achieving his articulated goal: ‘I have a long interest in

the betterment of humanity.’ ”

Kaplan’s long-cherished dream became a reality and the

uniquely organized cooperative would go on to achieve great

things. Today, the National/Welch organization is the world’s

leading marketer of Concord- and Niagara-based grape products. The National Grape Cooperative Association’s 1,497 patrons

supply its principal raw products from more than 44,000 acres of

vineyards in Michigan, New York, Ohio, Pennsylvania, Washington and Ontario, Canada.

In its 1998 annual report, Welch reported net sales for 1998

were a record $599.7 million and patron net proceeds were a

record $72.4 million. Over the past four years, at a time when

the food store industry and the total fruit juice industry have

grown less than three percent, Welch’s sales have increased 41

percent, or at a growth rate 14 times faster than the industry

in which it competes. Patron proceeds have increased an astonishing 46 percent. Since 1995, Welch’s has more than doubled

its share of market in the juice category. ■

Some information for this article taken from: “Welch’s Grape Juice: From Corporation to Co-operative” by William Chazanof (1977).

PAGE FROM THE PAST

Rural Cooperatives / May/June 1999 31
Top 100 Cooperatives

1997 Financial Profile

Dave Chesnick

A reprint of three articles that

appeared in “Rural Cooperatives”

magazine in late 1998. These articles provide an overview of business trends among the nation’s

100 largest agricultural cooperatives, based on fiscal 1997 data.

These articles provide a snapshot

of the fiscal status of the cooperatives, which suffered their first

sales decline since 1992 but still

managed to strengthen their overall financial position.

Price: Domestic $2;

foreign $3;

Cooperative Pooling

Operations

Research Report 168

Andrew A. Jermolowicz

The marketing practice of pooling as used by cooperatives is outlined in this report. Pools are

most prevalent in the fruit, vegetable, nut, rice and dairy industries. Pooling practices of fruit

and vegetable cooperatives are

discussed as a marketing alternative for their producer-members. The report clarifies pooling

practices and presents the structural, managerial, financial and

coordination aspects of a successful pooling program.

Price: Domestic $5;

foreign $6

Financial Performance

Of Local Farm Supply,

Marketing Co-ops, 1997

Research Report 172

Beverly L. Rotan

This report analyzes the balance

sheets and income statements of

local farm supply and marketing

cooperatives, comparing 1996 and

1997, and fiscal years and trends

over the past 10 years. The data

in the report represents four cooperative sizes and types. Income

statements and ratio analyses are

used to compare and contrast

cooperatives by size and type.

Price: Domestic $4.50,

foreign $5.50 

Local Farm Supply,

Marketing Co-ops

Financial Trends

Research Report 171

E. Eldon Eversull

The balance sheet and income

statements of 208 local farm supply and marketing cooperatives

are analyzed, comparing information from 1991 through 1997.

The data represents four cooperative sizes and types. Commonsize income statements and balance sheets are used to compare

and contrast these cooperatives.

Charts are used to look for trends

in balance sheet and income statements and financial ratios.

Price: Domestic $4.50;

foreign $5.50

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