Rural

COOPERATIVES COOPERATIVES

USDA / Rural Development July/August 2002 USDA / Rural Development July/August 2002

Adding value to

members’ crops

page 22

Adding value to

members’ crops

page 22
2 July/August 2002 / Rural Cooperatives

On July 1, 2001, a new state statute,

the Wyoming Processing Cooperative

Law, became effective. This law authorizes a limited liability corporation-like

business structure (with a modicum of

cooperative characteristics) to process

and market agricultural products. Other states are being asked to consider

enacting similar legislation. Promoters

suggest this will permit cooperatives to

attract outside equity. 

While this may seem attractive in

the abstract, cooperative leaders in

each state need to think through

whether to embrace entities formed

under a statute such as this for at least

two reasons. First, such entities may be

incompatible with the traits that distinguish a cooperative from an investorowned firm. Second, serious questions

exist as to whether such an entity is eligible for the public policy benefits

available only to cooperatives.

While there is no single definition

of a cooperative for all purposes, cooperative scholars, leaders and professional advisers agree that for any organization to be considered a

cooperative, it must have these three

unique characteristics:

1. It is owned by the people who use

its services.

2. It is controlled by the people who

use its services. 

3. Earnings are allocated to the

users based on patronage, rather than

to investors based on investment.

A business formed under the new

Wyoming law can have several traits

that are at odds with those usually associated with being a cooperative. Under

this law, a cooperative can have an

unlimited number of investor nonpatron members who aren’t required to

do business with the association, but are

entitled to vote and share in its earnings

on the basis of their level of investment.

Patron members are limited to one vote

each, while non-patron members may

have an unlimited number of votes.

Only one of an unlimited number of

directors must be elected by producer

patron members. Director(s) chosen by

the producer-patron members are entitled to 50 percent of the voting power on

the board. But this may fall short of the

level of producer control that is necessary to operate as a farmer cooperative.

No limit is imposed on the rate of

return investor-members can realize

on their investment, and up to 85 percent of each year’s earnings may be

distributed to investor members based

on investment. One or more outside

investors with two-thirds voting control can merge or consolidate the

entity into another entity, or liquidate

it without any support from the producer patron-members.

Cooperative leaders need to stop for

a moment and ask themselves: “Is a law

that permits this much deviation from

the cooperative norms of user-ownership and user-control—coupled with a

provision that only 15 percent of earnings must be returned to users based on

patronage—really a law authorizing the

formation of cooperatives?” If someone

can answer this question “yes,” a second question needs to be addressed:

“Just what, if anything, does the term

cooperative mean?”

When an organization calls itself a

“cooperative,” it has an obligation to

meet expectations that it will act like

one. Delaware could amend its laws to

create another statute that lets General

Motors or any other large investorowned firm call itself a “cooperative.”

But if such entities disregard the key

cooperative characteristics—user ownership and control and benefits flowing

to the users based on patronage—the

integrity of all cooperatives is called

into question.

Also, the thousands of successful

agricultural and non-agricultural cooperatives challenge the notion that

inherent defects in the cooperative

model make co-ops so inflexible and

unresponsive to change that they can’t

survive in today’s business environment. A true cooperative may not be

the appropriate structure for every 

rural business. But if the founders of a

new business don’t believe they can

achieve their objectives with a cooperative, then they can organize an LLC

or some other form of business, rather

than use political power to enact a law

that tarnishes the credibility of other

cooperatives.

Congress has bestowed a number of

privileges on businesses that conform

to the generally accepted vision of

organizing and operating as a cooperative. An entity structured to take full

advantage of the Wyoming Processing

Cooperative Law might have trouble

qualifying under any of the following

statutes:

Antitrust Immunity—Producer

associations formed under the

Wyoming law, which choose to give

voting power to non-producer/

investors, may well be in conflict with

the requirement for antitrust protection

under the Capper-Volstead Act that all

voting members must be agricultural

producers. The same eligibility questions arise concerning access to the proCOMMENTARY

States need to carefully consider new “cooperative” laws

continued on page 36
Rural Cooperatives / July/August 2002 3

Rural COOPERATIVES (1088-8845) is published

bimonthly by Rural Business–Cooperative Service,

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Copies may be obtained from the Superintendent of

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Washington, D.C. 20250-9410, or call (202) 720-5964

(voice or TDD). USDA is an equal opportunity

provider and employer.

Ann Veneman, Secretary of Agriculture

Michael E. Neruda, Deputy Under Secretary, USDA

Rural Development

John Rosso, Administrator, Rural BusinessCooperative Service

Randall Torgerson, Deputy Administrator, USDA

Rural Business-Cooperative Service

Dan Campbell, Editor

Vision 2000/KOTA, Design

Have a cooperative-related question?

Call (202) 720-6483, or

Fax (202) 720-4641, Information Director,

This publication was printed with vegetable oil-based ink.

United States Department of Agriculture

Rural COOPERATIVES COOPERATIVES

July/August 2002 Volume 69 Number 3

On the Cover:

Bottles of Welch’s fruit punch whirl past the watchful eyes of an inspector in a

bottling plant in North East, Pa. CEO Dan Dillon discusses how Welch’s adds

long-term value to the crops harvested by members of National Grape

Cooperative, beginning on page 22. Photos courtesy Welch’s

FEATURES

4 Bulking up

Co-ops continue trade recovery, paced by bulk goods

By Tracey L. Kennedy

6 Rising to the top

Small Wisconsin specialty dairy co-ops finding new niche markets

By Pamela J. Karg

11 Heavy debt pulls Farmland into Chapter 11;

new CEO Terry leads reorganization effort

By Patrick Duffey

12 Closing the gap

Utility co-ops see broadband service as way to preserve rural

communities

By Steve Thompson

17 Rural survivors 

Can value-added agriculture save struggling rural communities?

Congress hopes USDA grant program will provide needed stimulus 

By Dan Campbell

20 Storm shelter 

Utility co-ops, USDA working to spread Weather Radio coverage 

By Steve Thompson

22 Delivering value to members

Welch’s CEO says National Grape members reap benefits from

efforts to expand markets, develop new products 

By Dan Dillon

27 Unstable farm markets prompt more growers to

look to bargaining co-ops

By Dan Campbell, editor

DEPARTMENTS

2 COMMENTARY

30 MANAGEMENT TIP

33 NEWSLINE
4 July/August 2002 / Rural Cooperatives

Bulking up

Co-ops continue trade recovery, paced by bulk goods

By Tracey L. Kennedy

USDA/RBS Agricultural Economist

Editor’s Note: USDA’s Rural BusinessCooperative Service began an annual survey

of cooperative involvement in international

markets in 1997. Prior to 1997, cooperative

exports and imports had been measured at

five-year intervals. An overview of survey

findings for 2000, with comparisons to 1997-

1999, is presented here.

n 2000, U.S. cooperative

exporters continued their

recovery from the global

currency and financial

crises that plagued world

markets in the late 1990s. Export sales of

more than $5.95 billion were reported, a

jump of almost 25 percent compared

with a 6.4-percent increase for U.S. agricultural exports as a whole (USDA). Following record sales in 1997, cooperative

exports had fallen off sharply in 1998 and

had begun to recover only slightly by

1999 (figure 1).

While trends in U.S. trade point to

the increased importance of differentiated products relative to bulk commodities,

exports by U.S. cooperatives remain concentrated in bulk products. Of the total

for 2000, $3.99 billion, or 67 percent of

exports, consisted of bulk commodities

such as grains, oilseeds, and cotton, compared to 41 percent for U.S. bulk sales.

The majority of these shipments originated from a small number of large

cooperatives. Consumer-oriented or

high-value products, such as fresh and

processed fruits and vegetables, accounted for $1.62 billion, or 27 percent, of the

I

Figure 1—Agricultural exports by U.S. cooperatives, 1980-2000*

$ Billions 

1980 1985 1990 1995 1997 1998 1999 2000

8.00—

7.00—

6.00—

5.00—

4.00—

3.00—

2.00—

1.00—

0—

*Prior to 1997, cooperative exports were measured at five-year intervals.

Figure 2—U.S. cooperative exports by product category 1980-2000

$ Billions 

1980 1985 1990 1995 1997 1998 1999 2000

6.00—

5.00—

4.00—

3.00—

2.00—

1.00—

0—

Bulk

Consumer-oriented

Intermediate
total, compared to 36 percent for all U.S. consumer products.

Intermediate products—ingredients and partially processed

products, such as flours, meals, oils and feed—accounted for

$235 million, or almost 4 percent, compared to 21 percent

for comparable U.S. sales. In addition, exports of various

farm inputs and equipment totaled $108 million, or about 2

percent, of the total. 

Cooperatives’ overall share of U.S. agricultural exports

(excluding fisheries, farm inputs, etc.) for 2000 was approximately 11.3 percent. Co-ops had a 21.5 percent share of U.S.

bulk commodity exports, 7.4 percent of consumer-oriented

products, and 2.1 percent of intermediate products. 

Among the 91 cooperatives reporting in 2000, export sales

continued to be concentrated among a few of the largest cooperatives, with six co-ops—each having sales in excess of $100

million—responsible for 79.6 percent of

total exports. Those six cooperatives represented a range of agricultural products and

geographic areas. The magnitude of exports

among individual cooperatives ranged from

less than $10,000 to almost $3 billion.

Co-ops recover across most

commodities; market shifts continue 

Exports by cooperatives showed improvement across two of three major product categories in 2000 (figure 2). Bulk commodity

sales (primarily grains, oilseeds and cotton)

dropped more than 50 percent, from $5.4

billion in 1997 to $2.5 billion in 1998 and

$2.2 billion in 1999. However, they showed

a marked improvement in 2000, increasing

46 percent, to nearly $4 billion. Indeed,

increased sales of bulk commodities accounted for most of the gains in total cooperative exports from 1999.

Consumer-oriented products (mainly fresh and processed

fruits and vegetables, tree nuts, meats, dairy products and

other processed products), which had declined throughout

1998 and 1999 (10.8 percent and 17.5 percent, respectively),

increased 15 percent in 2000, to more than $1.6 billion.

Only 12 percent of the cooperative export gain in 2000 was

attributable to consumer-oriented products, compared to the

much higher proportion (two-thirds) registered by U.S. sales

of the same types of products.

Intermediate products (semi-processed products and

ingredients or inputs such as feed components, flour, meal,

oil, and animal byproducts) fell 24 percent from 1997 to

1998, then recovered with a 60-percent increase in 1999. In

2000, they fell off more than 52 percent, to $235 million.

Asia continued as the largest regional

destination for cooperative exports in

2000, accounting for $2.46 billion, or

41.5 percent, of the total (figure 3). Latin

America (primarily Mexico) continued to

emerge as an increasingly important customer, growing $1.41 billion, or 23.6

percent. African markets also climbed,

with $600.7 million, or 10.2 percent of

the total, while European destinations

continued to decline in importance,

accounting for $532.4 million, or 8.9 percent, of co-op exports.

While 2000 appears to have marked a

turning point for cooperative exporters

following the global economic woes of

the late 1990s, continued structural

change via mergers, alliances and dissolutions in a number of commodity subsectors signal significant change in future

co-op trading patterns. ■

Rural Cooperatives / July/August 2002 5

Asia 41.5%

Oceania 0.4%

Europe 8.9%

Latin America 23.6%

Middle East 2.3%

Unidentified 5.8%

Africa 10.2%

Canada 7.3%

Figure 3—Cooperative exports by destination, 2000

Total exports $5,952,588,675

Export sales by U.S. farm cooperatives jumped nearly 25 percent in 2000, with bulk goods

leading the way. USDA Forest Service photo
6 July/August 2002 / Rural Cooperatives

By Pamela J. Karg

Editor’s note: Karg is an agriculture

communicator based in Baraboo, Wis.,

with extensive experience writing about

cooperatives. 

airy co-ops merging to

create larger marketing

operations has been a

major news story of the

past decade. But a number of new, small dairy cooperatives that

service niche markets are also popping

up in America’s Dairyland. Their mission can be complex, but their message

is simple: gaining a share of a growing

dairy market for their members. 

In a dairy landscape dominated by

such large co-ops as Dairy Farmers of

America, Land O’Lakes, Foremost

Farms USA, Associated Milk Producers Inc., Swiss Valley and Alto Dairy,

the new Scenic Valley Protein Producers Cooperative is barely a blip on the

radar screen. But what Scenic Valley

lacks in size, it makes up for in the dedication of its members.

Started 4 years ago, the membership

now includes 11 farm families. They

are primarily “colored breed” producers. That is, they milk dairy cows other

than the familiar black-and-white Holsteins. Their president and field representative is Jersey producer Mike Gallagher of Darlington, Wis. 

“Our goal is to earn more money for

our milk,” Gallagher explains. “With

the cheese yield formula first proposed

by the National All-Jersey Association

and adopted by the U.S. dairy industry

several years ago, we naturally were

getting the full-value price for our

milk. When we didn’t have that available, we were getting approximately

from $1 to $2 a hundredweight less

than we’re getting right now.”

The Jersey cow

To understand Scenic Valley Co-op,

one first needs to understand the Jersey

cow. Compared to the five other major

breeds milked in the United States,

Jerseys give less milk. However, their

milk is higher in protein and butterfat—important ingredients for cheesemakers. In Wisconsin, 85 percent of

the 23 billion pounds (or 2.7 billion

gallons) of milk produced on its 18,000

dairy farms goes into producing 300

styles and types of cheese. That makes

cheese king in America’s Dairyland,

and it made the colored breed producers believe they had something of value

they could capitalize on.

“Jersey milk, on average in a Cheddar cheese plant, will yield about 100 to

125 percent per hundredweight of

what Holstein milk will yield. Thus, it

Rising to the top

Small Wisconsin specialty dairy co-ops finding new niche markets

D

Pep talk—Mike Gallagher nuzzles up to one of his Jersey cows. The new, Scenic Valley

Protein Producers Cooperative is producing for the specialty cheese market. Photos for USDA

by Pamela J. Karg 
Rural Cooperatives / July/August 2002 7

is of more value to the plant

and so, of course, to the owner,” explains Mike Brown,

general manager of National

All-Jersey, the breed’s national association, headquartered

in Reynoldsburg, Ohio. 

“We would meet at night, at

least once a week, to brainstorm ideas and discuss business,” Gallagher explains.

“Finally, we decided it was

time to try it.”

What the original five

families did was contract with

a small, privately operated,

family-owned cheese plant.

Several times a year, milk

from the Jersey producers is

picked up and processed separately into cheese. Once

aged, cut and wrapped into

consumer sizes, the producers

sell the cheese under their own label to

retail outlets. They also offer the

“Scenic Valley Jersey Cheese” products

at holiday time, combining it with

locally produced sausages and other

foods in gift boxes.

“The most interesting thing last

year, when orders came in, was to see

where they came from,” Gallagher

says. “There were orders coming from

all over the United States, and we did it

by just telling our co-op story to customers—and then putting a brochure

in every box we shipped.”

Telling its story 

Gallagher is one of five co-op directors. The others are Gene Dirksen, vice

president, from Darlington; Steve Holland, secretary, from Gratiot; John

Foley, Darlington; and Jonathon Primley, Blanchardville. Like their other four

member-farms, none of these five members milk more than about 100 cows.

The members pride themselves on the

natural farming methods they use, pasturing or grazing their Jersey cows on

green pasture about half the year.

That pasturing gives the cheese

made from the milk a “more natural

flavor,” the co-op’s brochure explains

to consumers. Cheesemakers agree that

milk shipped from different regions of

the state or even raised differently—

grazed vs. confinement—puts subtle

flavors into the milk. As cheesemakers,

their challenge is to then bring out and

enhance those subtle differences to

produce something consumers want. In

fact, that is the basis for the growth

seen during the past decade in the

number of farmstead cheesemaking

operations across the United States. 

In addition, pasturing or grazing

ruminants has also proven healthy for

humans who eat their meat or dairy

products. Those products have proven

to be higher in conjugated linoleic acid

(CLA), a cancer-fighting “good” fat

discovered by researchers (see related

story). 

The Scenic Valley families have

pledged not to use hormones in their

herds. Neither is animal rennet used to

make cheese. Rennet is the enzyme

that makes the milk set up so curds can

form. It occurs naturally in the stomachs of calves and some other animals.

Therefore, Scenic Valley’s contracted

cheesemaker uses synthetic rennet. Coop members use only enough pharmaceuticals to keep their herds healthy.

These producers are learning firsthand what large corporations and their

public relations and marketing

specialists already know: it’s all

about image. With help from

sources such as the Wisconsin

Milk Marketing Board and the

University of Wisconsin-Madison Center for Cooperatives,

the producers pulled together

their story in a brochure. The

four-color piece is printed from

a computer owned by the

cooperative. In fact, the co-op

is beginning to acquire more

assets. The members recently

purchased the old Darlington

town hall, which was previously

a rural school building. This

summer they will be renovating

the town hall into a cheese distribution center. They’ve also

purchased a cooler and trailer

so they can sell their cheese at

local farmers’ markets and will

make deliveries to a growing list of retail

outlets. 

“We’ll fix it up and offer our cheeses

for sale here, along with other Wisconsin products and maybe even some

antiques or gifts,” Gallagher explains,

leaning against the chalkboard still

hanging in the schoolhouse-turnedtown-hall-turned-cooperative. Last

Christmas, gift boxes were put together

and mailed from this building. It beats

doing it at their kitchen tables like last

year, Gallagher says.

Tough, but rewarding

It’s a bare-bones operation. The

cooler was purchased the last day of the

“going-out-of-business” sale held by

the local variety store. The counters

also came from there. They’ve hired

one person to help pack gift boxes,

while most members donate their time.

The building’s trim could use a coat of

paint and some remodeling is needed

on the inside.

Between the computer hardware and

the building, developing a logo and

working with a consultant to write a

business plan, the nine dairy farm families haven’t seen much return on their

investments yet. The co-op’s ability to

grow is hampered by the fact that the

Valerie Dantoin-Adamski and her husband have started their own

cheese label, Northern Meadows Cheddar, and formed a cooperative

with several other producers. 
8 July/August 2002 / Rural Cooperatives

number of dairy farm families in Wisconsin is dropping, though the number

of cows milked in the state remains

constant at about 1.3 million head. Still,

most Wisconsin dairy producers favor

Holsteins over Jerseys. And members

like Gallagher try to do it all—run the

co-op, negotiate prices with the cheesemaker, pay state-required bonding fees

to ensure the milk checks are good,

make calls on local supermarkets that

offer the cheese, talk to other suppliers

and distributors who are showing some

interest in the Scenic Valley idea—and

still find time to farm. 

“Easy? It isn’t easy. Let’s put it that

way. But it’s kind of fun,” Gallagher

says of trying to do it all, including

marketing the co-op’s seven products:

Cheddar, Colby, Creamy Jack and Pepper Jack natural cheeses, as well as garlic, plain and jalapeño cheese spreads.

“It does take a lot of time and someNearly half of Wisconsin’s 126 cheese plants now

produce at least one specialty product for a niche market. Moreover, the amount of specialty cheese produced

by each plant has increased to keep pace with consumer demand. That’s good news for producers like the

Adamskis and the Gallaghers because their CLAenhanced dairy product fits right into this trend.

Wisconsin now manufactures and markets over 300

styles and types of cheeses. It continues to lead the

nation in cheese production, accounting for 27 percent

of total output. In fact, 85 percent of the 23 billion

pounds of milk produced on the state’s 18,000 dairy

farms goes into cheese, or a total of 21 billion pounds.

Last year, 197.4 million pounds of that cheese was a

specialty product.

The state is home to the nation’s largest Brie and

Gouda/Edam cheese plants. The nation’s only Limburger and Gruyere cheese plants are located here,

just a few short miles from each other. The UW-Madison has one of the nation’s Dairy Research Centers,

funded by dairy producers and other portions of the

industry. The state has the nation’s only Master

Cheese Maker program. It allows cheesemakers with

at least 10 years of experience to complete a rigorous

2-year program to become certified in specific

cheeses. The cheesemakers and the Wisconsin Milk

Marketing Board then use the certification in marketing programs to tout the quality of Wisconsin-made

cheeses with consumers.

The state may never specifically tally cheeses such

as those marketed by Scenic Valley or the Wisconsin

Dairy Graziers co-ops. Cheeses made from a specific

breed, from cows on pasture, higher in CLA, farmstead

(made on the farm) or other variations fold into the tally

by general cheese variety. Nevertheless, it’s those

nuances that fuel growth seen in cheese consumption

and help farmers such as the Adamskis and the Gallaghers capture greater returns. 

However, Wisconsin cheesemakers are hardpressed to keep pace with growing consumer demand.

That’s because the state’s milk production remains

stagnant while the number of dairy farms declines. The

state remains home to nearly 1.3 million cows that

each produce an average of nearly 17,000 pounds

(almost 2,000 gallons) of milk each year. But cows in

other states produce, on average, more milk per cow.

That increases an operation’s efficiency and improves

return on investment.

In October, the Professional Dairy Producers of Wisconsin (PDPW) issued its second “state of the industry”

report. The farmer-led educational group encouraged

Wisconsin producers to grow their businesses so they

Wisconsin dairy industry has marketing options

Lesson #1—Gallagher uses an old blackboard in Scenic Valley’s new offices to underscore a

message near and dear to the hearts of co-op members everywhere. The building was formerly Darlington’s town hall and before that a rural school. 
Rural Cooperatives / July/August 2002 9

times it seems like just bits and pieces

here and there. But a lot of time and

contacts and legwork.”

Currently, only about 10 percent of

total milk production by Scenic Valley

members is separated out for production under their own label. This year,

the co-op hopes to create enough

demand that members have 50 percent

of their milk made into their product.

When they do, they’ll improve their

possibilities for grabbing a larger share

of a growing national cheese market,

Gallagher says. (See sidebar above.)

New co-ops in town

Scenic Valley might have been the

first dairy co-op in Wisconsin to try to

value its milk and cheese for its grazing

and Jersey characteristics. Yet, it’s not

the only one around. Since Scenic Valley formed, at least two other co-ops

have started. One is located outside

LaCrosse, while another is located in

northeastern Wisconsin, near Seymour.

“Within the last two years, we

became aware of some nutrients

(including CLA) that were in the milk

from cows on pasture that are not present in milk from cows fed typical

confinement feed,” notes Rick Adamski. He and his wife, Valerie DantoinAdamski, operate his family’s 100-

year-old Full Circle Farm. “We

started exploring the possibility of

marketing those nutrients. We’re also

learning more about the nutrients;

there are more nutrients in the milk

from these cows, so we have a whole

new area to explore.”

Typically, their milk goes to the

employee-owned Antigo, Wis., Cheese

Co. In conducting experiments to

determine the level and value of the

CLA in milk and then cheese, the

Adamskis contracted with a Green Bay

cheesemaker to process it separately

into white Cheddar cheese. Testing

proved the cheese retains the higher

CLA levels of the milk.

“We’re lucky we live in Wisconsin

with so many smaller cheese plants,”

Dantoin-Adamski says. “Rather than

learning the cheesemaking process and

putting in something here on the farm,

we contracted with Jim to process our

milk into cheese—just as we do for

hay-making and everything else on the

farm so that we can just concentrate on

grazing our cows.”

The Adamskis began marketing the

seasonal cheese under their own

label—Northern Meadows Cheddar—

directly to consumers and have formed

a cooperative with several other producers. They market it to some natural

food stores in northeastern Wisconsin

and in Madison, and a few upscale

delis carry the product. However,

can get their fair share of the increasing demand for

dairy products.

Producers can grow their operations in several ways,

said Hank Wagner, an Oconto Falls, Wis., producer and

PDPW president. Producers can expand, as his family

did, to milk 400 cows in a new set-up. Alternatively,

there’s plenty of room to grow production per cow in

Wisconsin, which ranks far below other dairy regions,

such as California, Idaho and New Mexico.

Producers could benefit from developing and following a business plan, he said. In fact, a Harvard University study showed that the amount of time spent in planning a business directly relates to its success. Owners

spending six months or less planning ended up with an

80 percent failure rate. Those who took a year or more

to plan ended up with an 80 percent success rate. 

Wagner said there are still other ways Wisconsin

producers can grow their businesses to increase milk

production. Some producers concentrate solely on

cows, hiring other farmers to custom raise heifers.

Other producers have purchased total-mixed-rations

(TMR) equipment and worked with nutritionists to

ensure cows eat well. Some producers routinely clean

tanks so cows have access to clean water and drink

more. Both are small moves, but improve milk production per cow as well as improve efficiencies while costing producers next to nothing, Wagner said.

Even with major changes—better barn ventilation,

better bedding to improve cow comfort, or installing a

flat barn parlor—milk production can increase while

producers save money doing some of the work themselves or even getting help from neighbors. That’s what

a group of Crawford County, Wis., producers did when

they worked together to help each other retrofit animal

housing units and work on a simple milking parlor. 

To some, these moves may seem like obvious business decisions to make. Yet, the traditions surrounding

Wisconsin’s dairy industry have made it difficult for

some producers to consider changing, or even increasing their operation size. Instead, the state has for too

long debated size rather than tackle business efficiencies, market share and capturing farm profits in a growing marketplace. Wagner and the PDPW leaders want to

change that.

“What I want Wisconsin dairy producers to understand from this report is that there is cause for hope.

There is a future in this industry. People can make money. Only none of us is doing it the same way our parents

or grandparents or great-grandparents did it. We can’t.

No business can,” he added.

Whether it’s changing the operation or developing a

niche in the specialty cheese market, PDPW is telling

Wisconsin producers it’s time to renovate and innovate.

Producers like the members of Scenic Valley and Wisconsin Dairy Graziers are heeding the advice. ■

—By Pamela J. Karg 
10 July/August 2002 / Rural Cooperatives

Dantoin-Adamski wants to make it

available to everyone, regardless of

income, because everyone deserves

good, nutritious foods.

Seeking higher premiums

Dantoin-Adamski believes the higher

CLA level of Northern Meadow cheese

can open the possibility of premiums

based on the CLA content in milk, if

the milk and related dairy products can

be marketed for their CLA content.

The all-natural Northern Meadow

cheddar has a flavor distinct to the

region where it’s made, and that flavor

will vary year-to-year depending on

sunshine, rain and plant growth. Full

Circle sold its cheese, made at a small

cheese plant in DePere, for $5 per

pound. At that price, the cheese could

support a milk payment price of about

$16 per hundredweight.

“The Adamskis’ efforts may provide

a model for other dairy grazers interested in adding value to their milk production,” said Stan Shaw, administrator

of Wisconsin DATCP’s marketing division. “By focusing on a possible consumer benefit found within their

cheese, they may have a firm foundation to enter the marketplace.”

“We have combined efforts with four

other family farms to form a new cooperative called the Wisconsin Dairy Graziers Co-op,” Dantoin-Adamski

explains. “These farms graze cows in virtually the same way our farm does.We

are pooling our milk and cheesemaking

so that we can make enough volume to

reach the economies of scale needed to

market our cheese efficiently.”

The handcrafted cheese is made

exclusively from the milk of these cows

that graze on grass and clover meadows. The Adamskis note that only

when cows graze on fresh plants

directly in the field can they obtain

higher levels of CLA. “This superior

Wisconsin cheese has a flavor that, like

a fine wine, is unique to the region,”

Dantoin-Adamski says, pointing out

that the conservation award-winning

Full Circle Farm and the other members of the co-op are located about 25

miles from Lake Michigan and on the

edge of the Nicolet National Forest.

Already participants in USDA’s Sustainable Agriculture Research and Education program in the 1990s, the

Adamskis received a $20,000 Agricultural Development and Diversification

grant this summer from the Wisconsin

Department of Agriculture. They are

using it to identify the marketing feasibility of pasture-based cheese and dairy

products for the Wisconsin Dairy Grazier Cooperative, the newest such

organization to form. The Adamskis

and the Gallaghers have talked about

similar challenges and opportunities.

“We’d like to stay right around 25

member farms,” Gallagher explains.

“But there are ways that our co-op

could work with other groups, like

the Adamskis, to offer other products

they might make. And I think all the

small co-ops need to get together

through an organization, like the

Center for Co-ops, to talk over common business issues so that we’re all

learning and growing.” ■

Increasingly, proponents of grass-fed livestock systems are gaining support and scientific research to substantiate the benefits of the food products they market.

In addition, several government-sponsored projects find

environmental and economic benefits when producers

switch to grazing operations.

According to Jo Robinson in her book “Why Grassfed

is Best!,” meat, eggs and dairy products from grass-fed

animals “are lower in total fat and calories but richer in

“good” fats, such as omega-3 fatty acids and the cancer-fighting fat, CLA (conjugated linoleic acid.). They

also have higher levels of a number of antioxidant vitamins.” Robinson, a New York Times best-selling writer, is

also the principal researcher for the “eatwild.com” Web

site. Her interest in grass-fed products grew out of her

previous book, “The Omega Diet,” co-authored with Dr.

Artemis Simopoulos. Her research is based on multiple

sources, including work completed by Dr. Tilak Dhiman.

Now a dairy nutritionist at Utah State University, Dhiman came to the United States from his native India as a

visiting student to the USDA’s Dairy Forage Research

Center at the University of Wisconsin-Madison and on a

farm outside Prairie du Sac, Wis. Dhiman found that the

fatty acid, produced by bacteria in rumen, is found in

especially high levels in milk and meat from animals

such as cows, sheep and goats. Researchers also found

that the CLA content of milk is as much as five times

higher when cows graze green, predominantly ryegrass

or on natural pastures, than when they eat diets consisting of 50 percent conserved forage (such as alfalfa and

corn silage) and 50 percent grain.

At the same time, researchers found CLA inhibits the

growth of chemically induced skin and stomach cancers

in mice, as well as cancer in the mammary gland of rats.

Synthetic CLA similarly changed the body composition

of laboratory animals; they developed more muscle and

had less body fat. Human nutrition research in the food

science department at the University of WisconsinMadison has shown that CLA is part of essential fatty

acids people need to fight cancer. While the relationship

between diet and cancer is extremely complex, the

studies bolstered specialty dairy marketing efforts. ■

Making a case for grass-fed animals
Patrick Duffey

USDA Rural Development

asting effects of the agricultural recession of

recent years, which has

left some farmers reeling

and driven others out of

business, finally caught up with North

America’s largest farmer-owned cooperative. Despite $11.8 billion in sales last

year, the weight of $1.9 billion in liabilities from rapid expansion in the 1990s

to better compete on world markets

forced Farmland Industries, Kansas

City, Mo., to file for Chapter 11 bankruptcy protection on May 31. Under

Chapter 11, firms seek protection from

creditors while they reorganize their

business. The bankruptcy process can

take a year or more to complete. 

In the wake of the filing, the cooperative has begun a summer-long

reorganization study to explore its

future. The investment bank UBS

Warburg has been hired to help evaluate what might be sold to reduce costs

and raise cash. 

After less than 2 years at the helm,

Robert Honse, Farmland’s chief executive officer, retired at age 58 in early

May. Farmland’s 22-member board

unanimously chose Robert B. Terry, 45,

to succeed him. Terry has been Farmland’s executive vice president, general

counsel and corporate secretary. Terry

saluted Honse for his 30-year career

with the cooperative and help in reducing debt by $500 million, cutting corporate expenses in half and securing a

new bank agreement.

Terry made

immediate changes

on his executive

staff. Steve Rhodes,

48, is the new executive vice president

and chief financial

officer, replacing

John Bernardi, who

has left the cooperative. Rhodes had

been a vice president and controller. Bob Schuller, 41,

succeeds Terry as vice president, general counsel and corporate secretary. He

had been associate general counsel.

Dennis Alt, another associate general

counsel, was named vice president for

strategic projects and will lead the

reorganization effort. Tim Daughty,

48, is the new vice president for administration. 

The 73-year-old cooperative was

pushed over the brink by an estimated

$30 million “run on the bank” in late

May due to an aggressive early redemption demand from subordinated debt

holders who had heard news of potential bankruptcy. The bonds are held by

about 20,000 individuals who provide

about $570 million in debt financing.

The bankruptcy court will inform those

unsecured creditors on how to confirm

and address their claims.

The cash-flow crisis was made

worse by a sagging nitrogen fertilizer

market in recent years. The situation

intensified as drought has squeezed

farmers in the West and heavy rains

soaked the Midwest, delaying cropplanting. The bankruptcy filing covers

Farmland Industries, Farmland Foods,

Farmland Pipe Line Co., Farmland

Transportation (transportation brokerage) and SFA Inc., a Midsouth retail

farm store operation. The filing does

not affect several Farmland subsidiaries, including Agriliance (a fertilizer marketing venture with CHS

Cooperatives and Land O’Lakes);

ADM-Farmland (a grain marketing

venture with Archer Daniels Midland);

and Farmland National Beef, a 5-yearold beef processing venture with U.S.

Premium Beef (which has the right of

first refusal to buy any available Farmland stock in the venture). 

While maintaining most of its

operations, the cooperative plans to

cut its workforce. In the past 2 years,

Farmland had trimmed 4,000 jobs but

still employs about 13,000 people,

including 900 in the Kansas City area.

Just before filing for bankruptcy,

Farmland paid its employees early and

asked them to cash their checks within

24 hours. Since then, Farmland has

closed 16 convenience stores in northeast Arkansas that it acquired when it

Rural Cooperatives / July/August 2002 11

Heavy debt pulls Farmland into

Chapter 11; new CEO Terry leads

reorganization effort

L

continued on page 38
12 July/August 2002 / Rural Cooperatives

By Steve Thompson, 

USDA Rural Development

t wasn’t so long ago

that telephone service

in rural areas usually

fell short of the standards city

dwellers expected. My grandmother, who lived in a small Ohio farm

town, had a telephone with no dial

until the 1980s. To make a call, she

picked up the receiver and gave the

number she wanted to the operator.

Some subscribers still had party

lines: phone lines that were shared

between a number of houses, making it possible for nosy neighbors to

listen in on phone conversations.

Today the scene has changed

dramatically. Most rural areas

have basic telephone service comparable to that available in cities.

While many rural areas are still 

struggling to gain access to Internet

services, others are further along than

cities in offering cutting-edge, broadband telecommunications service.

That’s appropriate, rural telecommunications advocates say, because

broadband communications give rural

areas access to many of the services

once confined to larger population

centers—services that are becoming

more and more vital to the economic

health of America’s heartlands.

These services include better educational opportunities and access to medical

specialists for people living in isolated

areas. It is becoming common for rural

students to take courses not available at

their local schools through electronic

linkups that create “virtual classrooms,”

where they are able to interact with

instructors and other students miles away. 

Similarly, telemedicine technology

makes it possible for medical specialists

to examine and treat patients living in

remote locations. It’s all made possible

through the use of computers and

broadband communications links,

which many rural telephone co-ops are

aggressively promoting.

What is broadband?

The capacity of a line or interface to

carry information is referred to as

“bandwidth.” The wider the “band,”

the more information. Voice communications over telephone lines take up little bandwidth compared to that needed

to transmit television signals or for fast

computer links. 

Broadband communications, using

more sophisticated transmission

hookups, make possible distance learning, telemedicine and a vast range of

other computer-based services. In

effect, this technology makes it possible

to carry on many kinds of business

activities irrespective of location, offering hope to many rural communities

hit hard by the recent vagaries of agricultural markets.

Closing the gap

Utility co-ops see broadband service

as way to preserve rural communities

I
Rural Cooperatives / July/August 2002 13

Data on a beam of light

Telephone signals were first carried

by ordinary copper wire, which could

handle only a few dozen channels per

strand. Coaxial cable, which has a single wire in the middle surrounded by a

woven wire sheath, came into widespread use in the 1950s, and had a

capacity about a thousand times that of

simple wire. 

Microwave radio links, using both

satellites and earth-bound chains of

transmission towers, offered even

more capacity—although atmospheric

conditions can compromise their

effectiveness. However, the advent of

the computer age, as well as the rise

of the mobile phone, resulted in a

vastly expanded demand for bandwidth, a demand that these conventional transmission mediums were

hard-pressed to fill.

The answer was to transmit data

with light, using fiber optics. Because

laser light is made up of identical waves

of the same frequency, it can travel

long distances without scattering. It can

also be modulated, like a radio wave, to

carry information. A special glass,

developed in the 1970s, makes it possible to transmit laser light through thin

filaments for up to 150 miles before it’s

necessary to amplify it. A thin bundle

of these filaments is capable of carrying

hundreds of times more data than a

coaxial cable.

By the late 1980s, fiber-optics cables

were being used increasingly for telephone trunk lines, and cable television

companies used them to transmit programming cross-country. 

New Mexico co-op

boosts education 

By 1990, the concept of distance

learning —in which a teacher interacts

with students in other locations via

television —was being tested by a few

pioneers. That’s when Dr. Robert Harris learned about it. Dr. Harris was the

general manager of ENMR Plateau

telephone co-op, which serves part of

eastern New Mexico and several counties in west Texas. Dr. Harris learned

about a distance learning project in

Arizona, and immediately decided that

a similar project could be useful to students in ENMR Plateau’s service area. 

Eastern New Mexico was ideally

suited for such an experiment. It is

beautiful, but very sparsely populated,

with a number of small, isolated communities. Dr. Harris knew that there

were schools throughout the area that

had so few students it wasn’t possible to

bring them specialized education

courses such as foreign languages, differential calculus, and other higher-level subjects. 

He quickly found a willing partner

in Clovis Community College in eastern New Mexico. The president of the

college, Dr. David Caffey, was

intrigued by the idea, and very quickly

an agreement was drawn up for a 5-

year pilot program under which the

college would provide remote classroom instruction through a fiber-optics

two-way television link. 

Drs. Harris and Caffey first discussed the project in the fall of 1990.

Only a few short months later, in time

for the spring semester of 1991, the

pilot program was up and running with

49 small-town students. The college

obtained funding under the “E-Rate”

program, a Federal Communications

Commission effort that taxes long-distance telecommunications companies

and makes the funds available to defray

the cost of telecommunications services

in schools and libraries. 

ENMR granted the college an easeTiny strands of glass fiber (left) can

carry far more information using beams

of light, than can older coaxial and

copper cables (below).
ment for the use of the fiber-optics

link, and two-way television systems

were set up in 12 small school districts.

The first video set-up was expensive

and clumsy, using direct fiber-optics

links with the switching equipment in

ENMR’s main office in Clovis. The

system made huge demands on bandwidth, and links had to be manually

switched at the headquarters.

Today, the use of new digital technology is making it possible for the project to bring distance-learning to nearly

a thousand students using less than 1

percent of the original bandwidth.

Computer software is now taking care

of switching, allowing the college to

take over all administration of the distance-learning program; the co-op now

merely provides the infrastructure. 

Expanded curriculum 

As the program has matured, the

curriculum has expanded, and recent

state legislation has made it possible for

students taking some advanced courses

to earn college credits concurrently

with their high school credits. The system is also used after hours by adults

taking college-credit courses and by the

New Mexico Department of Labor for

outreach to unemployed workers.

The carrying capacity freed up by

more efficient technology is used for

upgraded telecom service to individual

and business subscribers, including

high-speed Internet service over DSL

lines (see sidebar). 

The fiber-optic lines, which were

originally meant to serve only schools,

are ideally situated for serving the coop’s rural subscribers, most of whom live

near the participating schools or close to

the fiber-optics lines. Because the signal

degrades over distance, DSL is impractical more than three miles away from

the exchange or a fiber optic terminal. 

USDA helps Kansas co-op

with distance learning project 

Another co-op distance-learning

pioneer is Rural Telephone Service Co.

Inc., located in northwestern Kansas.

Rural Telephone was one of the first

companies to bring fiber optics into

rural service, laying several routes in

1988 with financial help from what was

then the Rural Electrification Administration (REA), now USDA Rural Utilities Service. 

“It was obvious to us in the midFiber optics offer the most efficient means of carrying

telecommunications over trunk lines. But it isn’t practical to use fiber optics for the connection between your

telephone or computer and your telecom exchange. For

that, a copper wire hookup is still used.

Computers that don’t share a local network talk to

each other through telephone lines using modems. A

modem translates the computer’s outgoing data into a

form that can be transmitted through the phone

hookup. On the other end of the line—usually at one’s

Internet service provider (ISP)—another computer

uses a modem to retranslate the information into a language that computer can use. The ISP computer,

called a server, routes the signal to its final destination.

Receiving information from another computer works

the same way, but in reverse.

The first modems were hooked up to telephones

through little speakers and microphones in a cradle that

held the telephone handpiece. Today, most home computers still use voice lines, but the modems are part of the

computer and are hooked directly into the phone circuit. 

Today’s phone modems are faster than earlier versions, but their top speed—nominally 56.6 kilobits per

second, but actually somewhat less—is barely 

adequate for most purposes, including down- and uploading files and browsing the World Wide Web. The

speed of such modems is limited by the capacity of

telephone circuits that are designed to carry voices,

not digital data. Anyone who has downloaded a large

file using a regular phone modem—a task that can

take an hour or more —knows their limitations. 

Not to worry. There are other ways to hook into the

Internet that offer much higher speeds. Cable TV

providers offer high-speed services that use their digital

cable systems, but the speed can fluctuate depending

on the number of users on the circuit. Another service,

offered through telephone providers, is Integrated Services Digital Network (ISDN), which sends both telephone and computer traffic over a special digital link.

Currently, ISDN service is expensive, and computer

speeds are limited to 128 kilobits per second. It is best

suited to businesses that need the special capabilities

of an internal digital telephone system.

One of the most popular high-speed services for

home and small business users is Digital Subscriber

Link (DSL). DSL uses regular copper telephone lines, but

sends compressed data through a special modem over

high frequencies unused in regular voice hookups.

Because it doesn’t use voice frequencies, it can share

the regular telephone line. The connection is always

“on,” and it doesn’t interfere with regular telephone service, the way a phone modem does. 

Best of all, connection speeds are anywhere from 6

to 125 times faster than regular dial-up modems—usually about 1.5 megabits per second. DSL is offered to businesses and homes by many rural telephone co-ops. The

National Exchange Carrier Association, a quasi-governmental agency, estimates that 65 percent of rural phone

lines are now capable of carrying DSL service. ■

—by Steve Thompson

Tapping into the Internet

14 July/August 2002 / Rural Cooperatives
1980s that if we wanted to build for the

future, fiber optics were the way to go,”

says Larry Sevier, general manager of

the co-op. 

A distance learning program soon followed. Today, 13 high schools, Colby

Community College and Hays State University participate in the program, bringing advanced and specialized curricula to

rural Kansas students. A grant from the

Rural Utilities Service’s Distance Learning Program is being used to expand the

two-way interactive television network

and add classrooms to the system.

More recently, Rural Telephone,

with the help of RUS, is helping make

it possible for Phillips County Hospital, located in the town of Phillipsburg,

Kan., to offer improved medical services all over the county—an especially

important service for a community

with a widely scattered population.

The project came about after the

non-profit organization that operates

the hospital, Great Plains Health

Alliance, embarked on an effort to connect member clinics and hospitals on a

common data network. With the help

of the Economic Development

office of Rural Telephone,

Great Plains, which is headquartered in Wichita, Kan.,

decided to build its pilot project in Phillips County. 

The healthcare organization

was able to form a consortium

of health care facilities, including clinics and a retirement

home, which received an RUS

telemedicine grant of $247,000.

The money is being used to

install computers in each

department of the hospital and

in participating clinics and

nursing homes. In addition, new fiber

optic lines are being laid between nursing homes and nearby hospitals in

Phillipsburg and Logan, another town

in Phillips County. 

For now, telemedicine cameras and

monitors will be installed only in Phillips

County Hospital’s education department

and one clinic—but data-sharing capabilities will mean a boost in efficiency for

all the participating facilities. The eventual goal is a broadband network providing data-sharing and telemedicine capabilities to participating healthcare

providers across several states.

Jim Wahlmiere, the administrator of

Phillips County Hospital, is looking

forward to completing the pilot project

by the end of this year. “I want to thank

Rural Telephone for all their help on

this, especially for their assistance in

getting the USDA/RUS grant,” he says.

Rural Telephone has used its fiberoptics lines to make DSL hookups

available to more than 80 percent of

its subscribers. And its willingness to

offer state-of-the-art telecom service

has helped it compete for subscribers

in Norton and Almena, towns served

by giant Southwestern Bell, where

Rural Cooperatives / July/August 2002 15

While only 5 percent of American towns with populations under 10,000 have access to broadband telecommunications—according to a 2000 report by the Commerce Department—funding is available to address the

problem.

In late March, Agriculture Secretary Ann Veneman

announced the availability of $300 million for distance

learning and telemedicine grant/loan combinations from

USDA Rural Utilities Service (RUS). The application

deadline for these funds is Aug. 31, 2002.

Both the Bush administration and Congress have recognized the importance of rural access to broadband.

The Farm Security and Rural Investment Act of 2002,

signed into law, amends the Rural Electrification Act of

1937 (which authorizes USDA Rural Development

telecommunication programs) to insert a new title providing specifically for loans and grants for “the construction, improvement, and acquisition of facilities and equipment for broadband service in eligible rural areas.” 

The Act makes available $20 million in loans and loan

guarantees for each of the fiscal years 2002 through

2005, and $10 million each in 2006 and 2007. These loans

by themselves could generate a total of $2 billion in private investment in rural broadband. In addition, another

$80 million in loans for the construction of new broadband facilities is authorized for fiscal year 2002 under

the Broadband Pilot Loan program, originally instituted

in 2001. However, RUS will not be taking new applications for the Broadband Pilot Loan program this year,

because it has applications on hand for in excess of

$350 million.

Besides these special programs, USDA Rural Development plans to continue using general telecommunications program authority, which includes hardship, “cost

of money,” rural telephone bank and guaranteed loans,

to fund broadband expansion. Since 1995, every new

telephone line funded by RUS has been capable of carrying DSL service. ■

USDA providing funding for rural broadband service

The Clovis Community College distance learning equipment is used after school hours for adult education

and outreach to unemployed workers. Photo courtesy

ENMR Plateau Cooperative
16 July/August 2002 / Rural Cooperatives

the co-op serves 95 percent of the

market. 

Sevier has one regret about being a

fiber-optic pioneer. When the co-op’s

first fiber-optics lines were installed,

nobody had any idea how great and

how quickly demand for service would

grow. Some of the cables have been

augmented, and advances in electronics

have made it possible for the existing

lines to carry more traffic. But Sevier

says he would lay larger-capacity cables

to begin with if he had it to do again.

Unlimited possibilities

for rural America 

Both ENMR Plateau in New Mexico

and Rural Telephone in Kansas see the

availability of high-speed Internet access

as crucial to the future economic health

of their service areas. The quality of education that distance learning makes possible for small school districts—as well as

the higher standards of medical care

offered by telemedicine—encourage

families to remain in rural areas instead

of moving to more urbanized locations.

And high-speed Internet, teleconferencing and related services using broadband communications to make it possible for businesses in rural areas to

compete in the national and world

economies in ways formerly not possible. 

Broadband makes it possible for

companies that rely heavily on telephone or Internet ordering to offer

employment to under-employed labor

pools in rural areas. It also facilitates

telecommuting—working from a location remote from the office or other

place of business—making it possible

for many people to work at jobs anywhere in the country, without moving

away from home. 

Neither co-op thinks that the possibilities of high-speed data transmission

have even come close to being fully

realized. In the future, broadband communications may offer rural areas

across America the ability to develop

new alternatives to reliance on farm

income and erase the economic gap

between town and country once and

for all. ■

Telemedicine equipment enables this boy in a rural Kansas town to be examined by doctors

in a distant location. Photo by Charlie Riedel 

Food business opportunities theme of NICE keynoter 

New opportunities for cooperatives within the food business will be the subject of the keynote remarks at the 74th National Institute on Cooperative Education (NICE) in Chicago Aug. 5-7. David Kohl, Virginia Polytechnic Institute & State University,

will discuss “Mega Trends in Agriculture and the Food System: How Cooperatives Can Benefit,” at the first general session

on Aug. 5.

Cooperative benefits contained in the new farm bill will be examined by J. B. Penn, USDA’s under secretary for farm and

foreign agricultural services. Eight symposiums are scheduled during the conference examining: biotechnology, co-op dividends from research, the role of cooperative boards in governing of joint ventures and alliances, audit committee responsibilities, co-op financial challenges, home-grown fuels, identity-preserved products and cross-border cooperatives. 

William Davisson, chief executive officer of GROWMARK Inc. and chairman of the NICE Education Committee, will preside at the NCFC education foundation banquet Aug. 7 and will provide concluding remarks for the conference. 

NICE is sponsored by the National Council of Farmer Cooperatives, which has named an executive committee to explore

the future needs of cooperative education and the future of the NICE conference. For registration information, contact Tom

Little at (202) 626-8700, or visit the NCFC Web site at www.ncfc.org, or write: NCFC Education Dept., 50 F.St. NW, Suite 900,

Washington, D.C. 20001
Rural Cooperatives / July/August 2002 17

By Dan Campbell, editor 

he internal combustion engine improved the

quality of life in rural America, but it also may

have doomed many of America’s rural farming

towns by expanding trading areas beyond the

distance a horse could travel in a day (the basis

on which many rural trading centers were founded). Many of

the farming communities that survived the coming of the automobile—particularly in the Great Plains—may not, however,

survive continuation of a farm policy that subsidizes production of commodity crops, leading to ever fewer, larger farms

producing more and more of the nation’s food and fiber, says

Bruce Babcock, an economist at Iowa State University. 

Ironically, the success story of the American farmer—his

ability to produce huge volumes of high-quality, low-cost

food—has been the downfall of thousands of rural communities, Babcock said. Speaking as a panelist on a rural development session at USDA’s 2002 Agricultural Outlook Conference, he noted that “However much we try to combat rural

stagnation with price supports and commodity production, I

think it will lead to large portions of physical and social infrastructure leaving vast areas of the Great Plains.” 

He cited an article in a recent issue of the “The Economist”magazine showing that rural counties that have received

the most farm subsidies during the past 20 years have also

suffered the greatest population declines. “I’m not saying

subsidies caused the population to decline,” Babcock said.

“But it is clear that encouraging commodity production with

price subsidies has not kept people in rural areas.” 

Babcock said that while Congress (in his view) may be

unintentionally accelerating outward migration from some

rural areas by showering “unprecedented levels of support”

on commodity crops, it is simultaneously seeking another,

more promising path to fighting rural stagnation: encouraging new value-added agricultural endeavors.

In 2001, USDA launched a new program to spark development of more value-added agricultural enterprises, as authorized by the Agricultural Risk Protection Act of 2000.

Though the Rural Business-Cooperative Service, it provided

$20 million in grants for 62 value-added ag projects, ranging

from a joint venture of two Illinois cooperatives studying the

possibility of building their own flour tortilla plant, to a new

market development project launched by the California Wild

Rice Growers Association. (The entire list of grants, as well as

information about upcoming grant rules and deadlines, can be

viewed at www.rurdev.usda.gov/rbs/coops/VADG.htm). Many

of the grants were awarded to cooperatives, but all producers

can apply for them.

However, the 62 projects funded represented just a fraction of the 509 applicants who sought $136 million in funding, according to panel moderator Randall Torgerson, deputy

administrator for USDA/RBS Cooperative Services. 

New Center to promote value-added ag projects

Congress—through the 2002 Farm Bill—is doubling

USDA’s annual value-added grant program to $40 million for

each of the next six years. The money will be used both as

grants for more value-added enterprises and to fund (with $2

million per year) an agricultural marketing center. One such

entity, the Agricultural Marketing Resource Center (AgMRC)

at Iowa State University (of which Babcock is a member of

the executive committee), has been formed through a partnership of Iowa State, Kansas State and Oklahoma State Universities and the University of California, with financial support from USDA. Smaller amounts of the appropriation will

T

Rural Survivors 

Can value-added agriculture save struggling rural communities? 

Congress hopes USDA grant program will provide needed stimulus 

The future of many farming-dependent rural communities may

hinge on the ability to develop new, value-added ventures that

create jobs and keep wealth at home. Congress has doubled the

size of a USDA grant program intended to promote value-added

agriculture. USDA photo by Ken Hammond 
18 July/August 2002 / Rural Cooperatives

also be used to fund several new valueadded innovation centers and for a

research project on value-added agriculture. 

The AgMRC’s main objective is to

create an electronic, Web-based library

that producers and producer groups can

access for information that will support

their value-added endeavors. AgMRC

staff will collect and interpret relevant

information and conduct research on

value-added agriculture. The center

will also compile information on business principles, legal, financial and

logistical issues that producer groups

should consider before investing their

money in a project, and it will coordinate research and extension programs

with value-added ag groups. The center

is a joint venture of extension, research

and industry, Babcock said, noting that

the center will operate with an industry

advisory council.

And what exactly is “value-added”?

Babcock said there are two basic definitions: 1.) Any activity that increases the

per-unit price received for farm production; 2.) Any activity that transforms a

product into another product that fetches more revenue on the market.

But will more value-added agriculture increase rural vitality? “I don’t

know,” Babcock said. Experience to

date, he said, “has shown that largescale, capital-intensive, value-added

enterprises, such as ethanol, will not

slow down migration from rural

areas.” People are more mobile

today—they will live wherever they

think can have the best life, he noted.

“All things being equal, businesses

will locate in areas where workers

want to live.”

Three ways to make money

Babcock said there are three basic

ways for farmers make money. “The

first is to be lucky,” he said. “Most

Iowa corn/soybean farmers made lots

of money in 1997—both yields and

prices were high; But not many will

obtain financing based on luck.” 

The second way is to offer a differentiated product or service that returns

more from the market than it costs to

produce or deliver. This means successfully duplicating what someone else is

doing or finding a new kind of market. 

The third alternative is to produce a

commodity at a lower unit cost than

anyone else can. “This is what drives

market prices down,” he said, adding

that investments in meat packing and

ethanol plants are attempts to make

money by being a low-cost producer of

a commodity. “It moves farmers from

producing one type of commodity to

two commodities.”

The experiences of the last 20 years

of farmer-owned enterprises “suggests

that groups of farmers can be the lowcost provider of a value-added commodity if they hire high-quality external

management and relinquish day-to-day

control to management,” he said. 

“Farmers face a different set of challenges when they want to produce a differentiated product,” Babcock said. He

Doyle Freeman, a beekeeper/honey producer from

Cherry Tree, Pa., and manager

of the Penn’s Corner Farm

Alliance, provided the valueadded panel with a small marketing co-op’s perspective. The

co-op was formed with nine

members in 1999 to help farmers in the Pittsburgh area

bypass wholesalers and distributors and sell directly to

upscale restaurants and grocery retailers. 

Consider the situation of

one member who grows green

bell peppers. The farmer

would traditionally sell his

crop to a Pittsburgh wholesaler for about $4.85 per

bushel. “The wholesaler would then sell to a distributor,

who would then sell to a purveyor in Greensburg, 40

miles east, and the purveyor would make final delivery

to restaurants—by which time the value of that bushel

of bell peppers had increased

to $11.90,” Freeman said. This

is a common problem, and

USDA data shows that, on

average, farmers earn only

about 21 cents of the consumer’s food dollar, he noted.

“That was the traditional

system,” Freeman said, “but

two people have problems

with it: the grower—who

often earns less than cost of

production, and the restaurant chef,” who loses a great

deal of freshness due to a

delivery system that may

have taken two weeks from

farm field to kitchen. 

By marketing through the co-op, the bushel of bell

peppers sells for $14 (the chef will pay a premium for

improved freshness), and the farmer nets $11.20.

Pennsylvania co-op targets upscale restaurant trade 

When he’s not helping his co-op sell fresh produce, honey,

meat and eggs to Pittsburgh’s upscale restaurants, beekeeper Doyle Freeman (left) sells his wares at farmers’

markets. Photo Copyright Andy Starnes/Pittsburgh Post-Gazette,

2002. All rights reserved.
noted that a member of his advisory

council says “the three biggest challenges farmers face in this arena are:

marketing, marketing and marketing—

meaning that most good ideas fail

because farmers do not realize how difficult it is to create a market for a new

product. A mentality of ‘I will produce

it, and a market will be created’ just does

not work,” Babcock said. That’s why

large food companies spend millions of

dollars on test-marketing and advertising. Even for good new products that do

make it to the market, getting shelf

space in retail stores is becoming

increasingly difficult, he noted.

Farmers can instead concentrate on

what they do best: production, and leave

the marketing to others, Babcock said.

“This can work if you are producing a

product that is difficult to procure elsewhere, such as the 75 Iowa hog producers who sell pasture-raised hogs to

Niman Ranch for a premium over commodity price for a unique product: natural pork.” If consumers continue to

demand more information about the

way food is produced, this type of valueadded agriculture may become a major

influence, as it has in Europe, he noted. 

Soybean co-op seeks

new marketing avenues 

Also participating on the same panel

with Babcock were two value-added

practitioners—one representing a medium-sized processing co-op, the other a

small marketing co-op (see sidebar).

The medium-size co-op, South Dakota

Soybean Processors (SDSP), was founded in 1996 as a new-generation co-op in

Volga, S.D. That co-op has completed a

fifth consecutive successful year transforming soybeans supplied by 2,100

members into soy oil, meal and hulls. 

Rodney Christianson, CEO of the

co-op since its founding, said that

SDSP’s primary reason for existing is

to generate value-added patronage

checks every year for his members.

“And they will let me know if they

don’t get it,” he said. 

In SDSP’s first five years of operation, it has crushed 112 million bushels

of soybeans, earned $25 million in

profits and members have received

$15.5 million in cash patronage. Share

values in the co-op have more than

doubled, from $10,000 to $21,000.

Farmers’ initial investment in the coop was $21 million.

“When I first joined the co-op, one

of the first things I tried to assess was

whether they were willing to make

investments needed to stay competitive,” Christianson said. He hoped to

invest $500,000 to $1 million per year

back into operations. But SDSP has

reinvested $11 million in the first five

years, “which certainly exceeds my

expectation.” 

Had the co-op stayed with its original plan to only crush 50,000 bushels

each day into oil, its earnings would

likely have been closer to $9 million

than $25 million, Christianson said.

Instead, it expanded capacity to 80,000

Rural Cooperatives / July/August 2002 19

Restaurants use the fact that they are cooking with

vegetables and fruits grown on local farms as a marketing tool. The co-op also custom-grows a number

of items for chefs that are otherwise not readily

available. 

Penn’s Corner has now about doubled in size, to 17

producers located in nine counties in a mountainous,

180-square-mile area surrounding Pittsburgh. Their primary market is 21 restaurants, the Greater Pittsburgh

Food Bank, and three grocery stores. The co-op supplies a wide variety of fruits, vegetables, herbs, honey,

eggs and meats.

After its first season, the co-op returned an additional

43 percent gross income over the traditional wholesale

market, Freeman said. “We have not eliminated the middleman, we have become middleman.”

Every weekend, each member sends the co-op a list

of what he or she will have available for sale. The co-op

then compiles the list of all members and distributes it to

customers, who have until Tuesday night to place their

orders. Tuesday night, members are notified of what

they need to supply. On Wednesday the growers harvest, then make delivery to one of a several co-op pickup points. 

The co-op confirms quantities and other order information, produces delivery tickets and invoices, and

delivers to customers on Thursday. Customers get their

products within 24 hours of being harvested. Growers

are paid the middle of the following month. From June to

November, when production is at its peak, additional

delivery days are added to the cycle. 

At this point, the co-op is seeking “slow, measured

growth” in order to keep customers happy with top service and quality food. “We have a waiting list of growers

who want to join us,” Freeman said. 

The co-op has gross sales of $260,000 annually, and it

keeps 20 percent for operations. For most members, the

co-op provides supplemental income; all but three members continue to rely on farm markets for their major

source of revenue.

Freeman said quality is the key to the co-op’s success. “We tell our members, if you would not put it out on

your farmers’ market table, don’t send it to the co-op.”

Cornell University did a survey showing that there are

28 co-ops performing similar functions from Virginia to

Maine. Managers of these co-ops recently gathered to

explore the possibility of building a network and established the framework for the new Northeast Federation

of Family Farm Cooperatives (NeFFFCo). ■

—by Dan Campbell

continued on page 37
By Steve Thompson

USDA Rural Development 

he United States has the dubious distinction

of being one of the countries on Earth most

prone to severe weather. Every year, Americans deal with an average of 10,000 thunderstorms, 2,500 floods and, especially, 1,200

tornadoes, as well as several hurricanes.

Many of these weather events, especially tornadoes,

strike quickly, giving people little time get to safety. And

they can be deadly. Last year, 39 Americans were killed by

tornadoes, and an average of 1,500 are injured by them

annually. This year may be even more dangerous: tornadoes killed 11 people in April and May alone, and meteorologists are predicting more tornadoes than usual. 

Many of the deaths caused by severe weather could be

avoided with enough advance warning. But tornadoes and

other destructive events, such as line squalls, can develop and

move at astonishing speed. A few years ago the movie

“Twister,” in which a small prairie town is devastated by a

tornado with no warning, dramatized the problem of effectively notifying people in their paths. Conventional warning

systems such as television and radio are inadequate because

notice of a tornado or line squall often gives only a few minutes’ time to get to shelter. If you’re not listening or watching, you can wind up out of luck. 

The answer to this problem is a radio receiver that activates itself and raises a noisy alarm when a storm warning is

issued. The National Oceanographic and Atmospheric

Administration (NOAA) operates National Weather Radio—

a network of special transmitters broadcasting on assigned

frequencies that can be picked up by special receivers. These

receivers can be set to a “standby” mode in which they

remain quiet until receiving a unique alarm signal. The alarm

signal activates the receiver, which then plays the warning to

everyone in earshot. An agency of NOAA, the National

Weather Service, issues the notifications, which, it claims,

give listeners at least 12 minutes’ warning of tornadoes—

ample time to get to shelter.

For the protection they offer, warning receivers are

cheap: the least expensive models retail for about $50. However, for them to work, there must be a transmitter nearby. A

look at a map of the operating transmitters reveals a number

of areas—especially in the western United States—that are

not close enough to a transmitter to receive broadcasts. 

Montana is one state that still has sparse coverage, a fact

that was driven home to people in the area of Circle, Mont.,

a town of approximately 400 residents in eastern part of the

state, on July 12 of last year. That’s when it was hit by a powerful line squall—a huge downdraft. Residents did not have

weather alarm receivers because there was no NOAA transmitter within range. No one was killed, but the storm caused

a considerable amount of damage.

Fortunately, help was available in the form of a new

program administered by USDA Rural Development’s

Rural Utilities Service (RUS). In April 2001, RUS issued

a Notice of Funds Availability for the Weather Radio

Transmitter Grant Program. Under the program, $5 million has been made available to non-profit corporations

or associations, local and state governments and Indian

tribes to build NOAA transmitters in rural areas with

poor or no coverage. 

Mid-River Telephone Cooperative, which is headquartered in Circle, found out about the program after being

contacted by the National Weather Service office in Glasgow, Montana. The Co-op worked with the Glasgow office

and another in Billings, as well as three local county governments to apply for grants for four transmitters in nearby

areas not receiving coverage. “We were thinking not just

about our customers, but about our employees, too,” says

Erin Lutz, who coordinated the effort. “We have the largest

service area of any telephone co-op in the United States,

and our maintenance people in the field spend a lot of time

far from convenient shelter. They need ample warning of

dangerous weather.”

The applications were for installing transmitters in Fallon,

Powder River, and Garfield Counties, as well as in Circle,

which is located in McCone County. Three of the applications were submitted by county governments; the fourth was

submitted by the co-op itself. “Wherever we had a cell-network or microwave tower, we donated space on the tower

and in the service building, as well as the necessary phone

lines,” says Lutz. One transmitter was not located in the coop’s service area, and so facilities were donated by a fellow

telecom cooperative.

20 July/August 2002 / Rural Cooperatives

Storm Shelter 

Utility co-ops, USDA working to spread Weather Radio coverage 

T
One transmitter, located in Fallon County, is already up

and running; the other two are expected to be operational by

the middle of the summer. “We’re running a heavy promotional campaign to encourage our customers to use these

transmitters,” Erin Lutz says. “We’re even considering making receivers available in our customer service offices in areas

that aren’t convenient to the nearest retail outlet.”

The National Weather Service has recognized Mid River’s

efforts with the Mark Trail Award, which it created to honor

people and organizations that have saved lives or protected

property by using or promoting NOAA Weather Radio. The

award was for filling the largest gap in the network in a nonmountainous area. Lutz says the award was a surprise to the

co-op. “We didn’t even know about the award until they told

us we were getting it,” she says.

USDA Rural Development also received the Mark Trail

Award in a ceremony on Capital Hill. Deputy Under Secretary for Rural Development Michael Neruda accepted the

award on behalf of RUS on April 17. The Agency was honored for its support for the expansion of the NOAA network

in rural areas, including its administration of the Weather

Radio Transmitter Grant Program. Since the program began,

RUS has distributed about $2.5 million in grants for transmitters on 43 rural sites—a sizeable contribution to the safety

and well-being of rural Americans.

Grant funds are still available for building weather alert

transmitters. Interested parties are encouraged to check out

the program’s web site at: http://www.usda.gov/rus/

telecom/initiatives/noaa/weatherradio.htm, or telephone

program coordinators Craig Wulf at 202-720-8427 and 

Orren E. Cameron, 202-690-4493, for information on 

how to apply. ■

Rural Cooperatives / July/August 2002 21

Famous comic strip character Mark Trail tells readers how to protect themselves from tornadoes. Rural Development’s Rural Utilities Service

won the Mark Trail Award from the National Weather Service for its efforts to promote the NOAA Weather Radio network. Reprinted with special

permission by King Features Syndicate, Inc. All worldwide rights reserved.
By Dan Dillon, CEO, Welch’s

Editor’s Note: This article is based on the keynote address Dillon

delivered to the Eastern Member Relations Conference in Buffalo,

N.Y., in May.

t Welch’s, and as a cooperative, our mission is different in several very important

respects than if we were a publicly held

company. 

Providing a secure market and increasing demand for

our members’ quality grapes and other non-financial

measures are central elements to our mission. Adding

value to our co-op, delivering value to our members, is

quite different from that of a public company because

our mission is different. Our owners have different goals.

What they expect from their ownership is different from

what, for example, a General Mills’ stockholder expects. The

question then is, what do they want? What adds

value for them?

In the late 1990s, we surveyed our National

Grape directors and delegates and asked them to

rank 15 possible actions we could take to add value to our members’ ownership. What were the

most important, most relevant measures of performance?

The study results were very instructive. Not

surprising, topping the list were:

• total patron proceeds,

• earnings per ton and

• growing the enterprise.

But what was particularly enlightening in the

survey and in follow-up discussions was the high value National

Grape members put on other, more subjective measures:

• Providing a secure market when the industry is in surplus.

• Growing the demand for their grapes.

• Providing an opportunity for them to expand production—to plant more grapes.

• Having the receiving and containment capacity to handle even large crops in a timely manner.

• And, most important, having confidence in the marketing capability of the co-op to sell their entire crop—even

a bumper harvest.

Based on this research and discussions, we have over time

refined our mission.

Corporate mission

The mission of our company, as a cooperative, is to: 

• maximize long-term grower value and

• provide a reliable market for members’ grapes through:

– excellence in product quality, 

– customer service, 

– market responsiveness, 

– and consumer satisfaction.

Our mission, in addition to the obvious objective of more

proceeds in the present, includes increasing demand and providing a secure market for all our members’ grapes over the

long run.

It is important to understand that there is a price for these

additional elements of the mission. They add value, but there

is a tradeoff in that they reduce proceeds in the short term.

22 July/August 2002 / Rural Cooperatives

Delivering value to members

Welch’s CEO says National Grape members reap benefits

from efforts to expand markets, develop new products 

A

Financial measures survey

National Grape directors and delegates ranked these actions for importance in adding value to their crop:

Patron Proceeds Debt-to-Equity Ratio

Proceeds per Ton Total Debt

Sales Growth Acreage Growth

Premium Over the Cash Market Profit Above Cost of Production

Earnings per Acre Harvest Containment Improvement

Return on Equity Invested Administrative Expenses

Total Proceeds Plant Operating Expenses
Rural Cooperatives / July/August 2002 23

If our mission were only to maximize

proceeds or maximize proceeds per ton,

then the actions we should take would be

different. Our investments would be

focused differently from what they are currently focused on.

We literally take thousands of actions

every year that reduce proceeds per ton for

the current year. But these actions are

essential to achieving the other dictates of

our mission:

• Maximize long-term grower value.

• Provide a secure market.

• Increase demand for all the members’

quality grapes.

Let’s look at some real examples driven

by this mission.

In the early 1980s, Welch’s was receiving 192,000 tons of grapes per year, but

only selling 168,000 tons—demand was 10

percent less than supply. Every year,

inventories were building as deliveries

continued to exceed sales. We were headed

for a disaster.

Welch’s recognized this dilemma and

made the very difficult decision to invest in growing demand

even though it depressed earnings $75 to $100 a ton in those

investment years. We were sacrificing short-term proceeds

per ton for other important longer-term objectives.

The alternative, and one we not only considered but one

often used by other co-ops and companies faced with a similar situation, was to allocate the number of tons our members

could deliver.

But, we didn’t do that. In 57 years, we have never done

that. We took all the grapes and invested heavily in marketing, in new products and advertising to increase demand over

time—even though it seriously depressed the proceeds per

ton we were able to pay in the short term.

But the investment in receiving and marketing all our members’ grapes not only increased demand to absorb the greater

supply, but it also increased demand so that by the mid 1990s we

were offering our members opportunities to plant more grapes.

In an average year in the 1980s, we sold 192,000 tons and

A technician performs quality-control testing on

bottles of Welch’s grape juice. Right, Concord

grapes are ready for harvest. Photos courtesy

Welch’s/National Grape Cooperative
paid $197 per ton. But by the 1990s,

Welch’s had increased demand to

274,000 tons a year. The increased

demand allowed us to earn an average of

$252 per ton—28 percent more per ton

on 43 percent more tons sold per year—

almost doubling (up 83 percent) total

proceeds per year back to the members. 

But creating and maintaining this

demand also has a price. Today, for

example, Welch’s invests more than $80

per ton every year in advertising alone. 

There are some who would suggest

that we should sacrifice that advertising

investment or other marketing investments in some years in order to increase

short-term earnings. 

In 1999, for example, we had

increased demand so quickly in the

mid-1990s that the cash market for

Concord grapes shot up and was actually higher than the earnings we paid our

members. A seemingly simple solution

would have been for us to reduce or

eliminate the advertising or new product investment or other investments to

increase our earnings $100 per ton.

We could have materially beaten

what others were paying if we did, and

we could have easily moved all the tons

we were receiving without advertising

in that year. But our mission demands

that we maintain a consistent investment in growing demand—in order to

maximize long-term owner value. 

The logic of that commitment really

manifests itself in a year of big crop

surpluses (as 2002 appeared to be prior

24 July/August 2002 / Rural Cooperatives

Editor’s Note: Crop losses in Michigan for both the

2001 and 2002 crops will have a devastating impact on

many members of the National Grape Cooperative

Association, the farmer-owned parent company of

Welch’s that processes and markets their grapes as

juice, jelly and other products. Some, and perhaps

many, will not be able to continue in farming. In areas

of New York, Pennsylvania and Ohio, National members have also suffered extensive frost damage this

spring. National Grape and Welch’s are working

closely to obtain disaster relief. 

After scraping to harvest a 2001 crop up to 75 percent smaller than normal, juice-grape growers in

southwestern Michigan figured it couldn’t happen two

years in a row. It didn’t.

Due to a drastic temperature swing in late April, the

2002 pickings are even worse.

“It’s still hard to gauge, but I’d say at this point

we’ve lost 90 to 95 percent of this year’s crop,” says

Jon Hinkelman, who farms 220 acres evenly split

between Concord and Niagara grapes near the town

of Bainbridge, in the heart of Michigan’s grape-growing country. “Our area consists of a widespread range

in radius and it is very uniform—there are places

where 100 percent of the crop is gone.”

The trouble started when temperatures rose as

high as 92 degrees. “That pushed things along to a

very volatile state, then there were the cold temperatures a few days later,” says Hinkelman, a member of

the National Grape Cooperative Association.

The mercury hit a low of 18 degrees on April 23,

leaving Michigan growers scrambling for ways to salvage what they could. Even the secondary buds can’t

make up for much of the loss.

The small amount of fruit that can be harvested

may not contain a high enough sugar content for use

by Welch’s. “It’s difficult with a secondary bud to

obtain a really desirable (sugar) level,” Hinkelman

says.

Even programs set up to help Michigan growers

may backfire, due to the consecutive crop catastrophes. Many have taken advantage of zero-percent

loans made available through a state program,

spurred by the efforts of National/Welch’s. But these

growers now find themselves constricted by the

short terms of the loans—most have a four-year payback, with some stretching to five.

“Nobody counted on back-to-back years like that,”

Hinkelman says. “With terms like that, that’s a lot of

money to pay back over a very short time when cash

flow is very, very low.” An additional issue facing

growers who waited to apply for state assistance:

qualifying for the loan now with the diminished repayment outlook for the 2002 crop.

Growers in northwestern Pennsylvania initially

thought they had gotten off relatively easy, despite

similar weather conditions in late April. Bill Beckman,

who grows grapes on 325 acres in the townships of

Harbor Creek and North East, Pa., said only 30 or 40

Co-op working to help growers hit by devastating crop losses 

Squeeze bottles of Welch’s grape jelly on

their way to a grocery store near you. 
Rural Cooperatives / July/August 2002 25

to some devastating freezes in late April and May). Concord inventories have been running at record-high levels

because of the increased supply and low prices for California grapes. Demand for Concord is flat to declining—for

everyone else, but not for Welch’s. And if that were not bad

enough, other processors are already warning that there

may be a significant reduction in the price they pay for

Concords in 2002. But for Welch’s members, the consistent

investment made in growing demand has not only added

value through the opportunity to plant more grapes—we

just concluded the biggest planting program in our 57-year

history—but we will also materially increase our earnings in

fiscal 2002 vs. 2001. 

We are adding value by consistently investing in increasing

the demand for Welch’s products—increasing the demand for

Concord and Niagara grapes—through advertising, new

products, marketing programs in new channels of distribution, such as club stores and single-serve channels, through

health and nutrition research and public relations programs.

At the same time that we had been investing in increasing

demand by more than 80,000 more tons per year, we recognized that tens of millions of dollars in capital investment

would be required to receive and contain those grapes. 

As a co-op, our mission includes providing a secure market—particularly in times of surplus—another way we add

value. Welch’s has established a policy for receiving and containment aimed at minimizing the risk that our quality

grapes will not be harvested, received or contained.

This is an investment well beyond what a public or nonco-op company would make because it reduces profit. It is an

added value that we provide to our members. But it’s not

free. We have calculated that our receiving and containment

strategy costs our members about $30 a ton every year.

Perhaps this can be viewed as insurance. Our members

sacrifice $30 a ton in proceeds most years in order to ensure

they get all their grapes delivered in exceptional years—as in

2002—or 1992—or 1996.

The original 2002 forecast was for a record crop of

acres were hit by frosts in late April and early May.

But the worst was yet to come.

“The biggest damage came on May 20,” Beckman

said. “Our high ground got hit, stuff that hadn’t frozen

in 25 or 30 years got hit this time.” Beckman said he

can’t be sure how bad this year’s crop will be until

assessing secondary and tertiary growth in July, but

that it’s certain to be the fifth poor harvest in the past

six seasons for area growers.

Officials of National/Welch’s say the organization is

working on ways to adapt to this year’s unforeseen

crisis. Until the wild temperature swings in Michigan

and elsewhere in grape country, a yield 53 percent

larger than the previous year’s had been forecast.

“We went back to Capitol Hill in May, 2002, in

response to the current crop disaster,” said Vivian

Tseng, vice president and general counsel for Welch’s.

“The National/Welch legislative team is working

closely with our elected representatives in Congress

to seek an appropriate legislative vehicle for a direct

assistance program to address crop losses in both

2001 and 2002.”

The crop failures also put growers in a different

kind of crunch, since past crops are averaged to

arrive at future estimates for insurance benefits.

“The severe losses we experienced in two consecutive years will hurt our ability to adequately insure

our crops against future losses,” Hinkelman said.

“Years ago, there were grant programs, which were

designed to cover crop disasters. But these were

scrutinized by the public so the federal government

decided against disaster programs in favor of insurance programs.” In this way, growers would have the

ability to protect themselves. The cost is somewhat

subsidized because the premiums are so high, he

explained. 

“These two years that will go against our ability to

insure our crop are devastating,” Hinkelman said. “In

the past, they had grant programs, which were based

on your loss. This has been something that the public

scrutinized, so they expanded on the insurance program so that you have the ability to protect themselves. The premiums are subsidized, because the risk

is so high.”

Tseng said National/Welch’s is also exploring ways

to alleviate that problem. The organization is still

assessing crop losses in other prime growing regions,

including western New York and Pennsylvania.

A Senate amendment that would have provided

more than $2.3 billion in disaster relief to growers of a

variety of crops nationwide, including grapes, was

trimmed from the Farm Bill earlier this year.

Despite enduring consecutive crop catastrophes,

Hinkelman maintains an optimistic view of the industry’s future.

“I think you’ve got an industry to be very proud of.

Both Michigan and our federal people have an industry that’s worth protecting,” he says. “The grape

industry has been one of proud heritage—we just

don’t ask for help. [Editor’s Note: Grape growers currently receive neither government support nor subsidies.] We have a great marketing arm in Welch’s. I

think the industry will be here in five years, but we

need to look at ways to make things better.” ■

—by David Staba
26 July/August 2002 / Rural Cooperatives

The Welch’s name has long been associated with the

grape industry. The company traces its origins to Dr.

Thomas Bramwell and his son, who, in 1869, gathered

Concord grapes near their home in Vineland, N.J., and

pasteurized and bottled the squeezed juice. In 1897, the

founder’s son, Dr. Charles Welch, moved the company to

Westfield, N.Y., where it still produces the popular grape

juice, although its headquarts to Concord Mass. in 1982.

Today, Welch’s is the marketing arm of the National

Grape Cooperative Association, which purchased the

firm in 1956. Grape supplies for the company’s products

come from the 1,400 grower-owners operating more

than 49,000 acres of vineyards in Pennsylvania, New

York, Ohio, Michigan, Washington state and Ontario,

Canada. Welch’s is the world’s leading marketer of Concord and Niagara grape-based products which are sold

throughout the United States and 38 countries around

the world. Sales for fiscal 2001 reached $650 million and

net proceeds topped $67.4 million.

CEO Daniel Dillon credits the company’s success in

maximizing shareholders profits to its status as a cooperative. Its aim is to preserve the long-term livelihood of

its member-growers and to provide a reliable market for

the grapes via extensive advertising, customer service

and consumer satisfaction.

A third of its sales come from new products introduced in the past 5 years. Dillon believes new packaging has helped the company get more products into different sections of supermarkets—from the juice shelf to

the freezer case to the refrigerated foods section.

Welch’s has gained a greater presence via vending

machines, convenience stores and membership wholesale clubs. Wider exposure has led to higher sales. 

The company attributes part of its success to a wellbalanced board containing growers, professional managers and outside directors. Strong international

growth is developing in the Latin America/Caribbean

region. On the domestic front, Welch’s became the first

major juice company to introduce a plastic, ready-forschool size bottle. ■

Welch’s roots extend to 1869

342,500 tons, or 53 percent (118,000 tons) more than in

2001. Welch’s was fully prepared for this, because we had

made the investments to receive, contain and sell that entire

bumper crop. But spring freezes in Michigan and in the tristates region (New York, Pennsylvania and Ohio) reduced the

projected crop to one that is now expected to be only 6,800

tons, or 4 percent, larger than last year.

If our mission were to maximize the proceeds per ton on

the tons we receive—a logical objective if we were a public or

non-co-op company—then we probably would not accept all

the grapes originally forecast or even the current, more modest expectations.

The point is, the cost of having a secure market in a year

such as 2002 was originally projected to be, is reflected in an

earnings-per-ton reduction. The value of maintaining

demand, growing demand, having the resources ready to

receive and contain exceptional crops, the value of having the

marketing flexibility to sell 50,000 or 100,000 more tons in

an exceptional year, is why National Grape members choose

National...and Welch’s. 

There is also a serious trend to consider—the substituting of

California grapes and foreign grape juice for Concord. For 133

years, Welch’s has defined grape juice with the unique, distinctive, special taste of Concord. Only in North America is the

Concord taste the taste of grape juice and grape jelly. In the rest

of the world, when a consumer thinks of grape juice, the taste

expectation is entirely different from the U.S. consumer.

This expectation is critical to our growers. The substitution of California grape juice for Concord may still produce a

nice-tasting juice, but it is not the unique taste of Concord.

Much of our product formulation work, our marketing,

advertising and health and nutrition efforts are focused on

the unique taste and health attributes of the Concord grape.

It is imperative that Welch’s continue to drive these efforts.

While other juice manufacturers are substituting California and foreign grape juice for Concord, National Grape

growers can rest assured that they have a secure market at a

higher, more stable price because they own Welch’s.

Our mission is not to maximize earnings per ton or to maximize profits or return on members’ equity. Rather, our mission is focused on creating long-term value for our members.

We believe the success of Welch’s strategies to build value for

our members has indeed been fulfilling that mission.

Obviously, the spotlight will always remain focused on the

proceeds per ton we pay. But there is recognition of the value

provided through:

• increasing demand—creating opportunities to expand, 

• providing a secure market even when the industry is in

surplus, or the quality is compromised,

• having the receiving and containment capacity to handle

even exceptionally large harvests in a timely manner,

and, most important, 

• the confidence in Welch’s marketing capabilities to maintain the relevance of the unique Concord and Niagara

taste and to sell the entire crop—even a bumper crop.

This is value over and above the proceeds per ton we pay.

It is real. Is it worth $50 a ton? $100 a ton? In many years, as

in 2002, it might be priceless. ■
By Dan Campbell, editor

argaining co-ops and production contracts have

long played a role in helping farmers and ranchers

secure a fair price for

their products, but the wilder-than-normal swings in commodity prices in

recent years may prompt even greater

use in the future. Representatives from

the beef, poultry and processing tomato

industries, who participated on a

panel discussion at USDA’s 2002

Agricultural Outlook Conference

each described various ways these

tools can help producers meet the

challenges ahead. 

Dan Looker, business editor of

“Successful Farming” magazine

and the moderator of the panel

discussion, said he began noticing a sharp increase in interest in

bargaining co-ops about four

years ago, when a group of “progressive farmers from Iowa, Illinois and other Midwestern states

gathered to discuss something

that has been around for decades:

bargaining co-ops. They began making trips to California, Maine and

other states where these types of coops have been operating. Because of

that, our magazine also rediscovered

bargaining co-ops and began writing

about some of the more successful

co-ops,” Looker said. “Successful

Farming” also sponsored a “Marketing Clout” conference last winter featuring presentations by bargaining

co-op leaders. 

Tomato growers struggle

to find market balance

“An old pot still cooks good soup,”

John Welty said, quoting an old French

proverb. Welty, executive vice president

for the California Tomato Growers

Association (CTGA), was referring to

the Capper Volstead Act, which allows

producers to jointly discuss price and

trade information, and has helped to

foster thousands of cooperatives and

bargaining associations. Welty is well

practiced in the art of bargaining for a

crop price, having long led CTGA in its

efforts to bargain for fair prices for California tomato growers. California farmers produce about 95 percent of the

nation’s supply (and 40 percent of the

world supply) of processing tomatoes. 

The role of bargaining cooperatives, such as his, is still not well

understood, but they play a vital role

in promoting the interests of farmers—particularly producers of specialty

crops who rarely qualify for subsidies

or other support programs, Welty said.

For the canning tomato industry,

reports given at the start of the conference that the agriculture economy is

“reasonably stable” are far from accurate, Welty said. The market may have

stabilized for producers of subsidized

crops, but specialty crop producers have

suffered a 20-percent decline in prices

during the past five years. “That’s a

huge drop in net income,” he said. 

Production costs are high for specialty crops—averaging $1,800 per

acre—and margins are “razorthin,” usually 5 percent or less,

Welty said. 

California, which produces

350 crops—including the lion’s

share of many of the nation’s specialty crops—long felt it was insulated from the supply-price roller

coaster that farmers in most other

states live with. Growers in the

Golden State have long used crop

diversification as a primary risk

management tool. But that has

profoundly changed in recent

years, with markets for California

specialty crops “one by one succumbing to over-planting, over-supply and

eroding prices,” Welty said. 

CTGA has long argued that commodity program “flex acres” not be

allowed to be switched over to vegetables, because this kind of shift would

distort vegetable markets that had previously been free from subsidy influence. Welty noted that even small

shifts in program crop land into vegetable crops could “ruin the markets

with near-instantaneous over-supply. 

Rural Cooperatives / July/August 2002 27

Unstable farm markets prompt

more growers to look to

bargaining co-ops

B

About 95 percent of the nation’s supply of processing

tomatoes are produced in California. USDA photo 
28 July/August 2002 / Rural Cooperatives

“And low and behold, that prophecy

became reality,” Welty said. “While we

were able to keep the wolf away from

the door for seven years, as program

crops lost their subsidies (and other

major producing parts of the world did

not remove theirs) world prices plummeted.” U.S. program crops began

moving “freed-up acres into high-margin crops,” Welty continued. “This

trend has completely undermined the

cornerstone of the risk-management

strategy of specialty crop growers.” 

Contracts can spread risk

for specialty crop farmers

Almost one-third of U.S. crops and

livestock and 40 percent of U.S. fruit

and vegetables were grown under production contracts in 1997, according to

USDA data he cited. That’s more than

double the amount grown under contract a decade before, Welty said. 

With contracts, the handler shares

the risk with the grower, he noted.

Quality incentive contracts reward better quality crops, which also benefit the

processor. 

“The ability to transfer title of vast

quantities of fresh, red-ripe, perishable

tomatoes in a manner that shares risk in

a rational fashion is a major asset, and

should not be trifled with,” Welty

stressed. 

Growers used to worry about large

food companies vertically integrating,

buying land, buildings and production

capability, Welty noted. “But why own

farms if you can own the farmers?”

Welty said, quoting ag law expert Neil

Hamilton, stressing the vulnerability of

farmers in the marketplace. 

“First we had marketing contracts,

where price was set before the crop was

produced,” he said. Under these contracts, farmers retained ownership of

the crop up until delivery.

“Then we saw production contracts,

where processors maintained more

control of the product, from beginning

to end,” including seed variety, the

crop (once the seed was in ground),

harvesting and hauling. 

“Now we are seeing risk-sharing

contracts,” which Welty said shift risk

“against the farmers’ side of the equation. Many of these contracts are written so that farmers have to take them or

leave them,” he said, suggesting that

farmers “should just say no to these contracts, in general, until they have the

power to negotiate better agreements.” 

The 1967 Ag Fair Practices Act—

which does not require good-faith bargaining and dispute resolution and

enforcement —is “flawed and has fallen

out of use,” Welty said. The main flaw,

he continued, is that it does not compel

good-faith bargaining by handlers, and

implies that handlers are not required

to deal with bargaining associations. 

“The need for growers to secure

fair, reasonable prices has never been

more pressing,” Welty said, adding that

this should be a critical component of

U.S. farm policy. 

Poultry growers still

seeking national voice

Mary Clouse, project director for

Rural Advancement Foundation International (RAFI) in North Carolina,

said income for chicken producers is

also lagging far behind a fair level, and

that the industry has been struggling

for many years to forge an effective

national cooperative or bargaining

association that can help growers gain

better margins. 

In the early days of the industry,

farmers owned their chickens, bought

their feed and built their own poultry

houses. “They sold their birds when

they were ready. 

“But efficiency dictated that it was

better for the processor to own the

birds, own their own feed mills and

hatcheries and to contract with farmers

to raise birds. In the process, farmers

lost much control over their operation,” she said. 

Virtually all broilers in the United

States are currently raised under contract to an ever-declining number of

large processors. She estimated that

there are 24,000 contract poultry growers in the United States providing more

than 7 billion broilers to 42 major poultry companies. “When I started in the

poultry business there were 160 major

companies, so there has been tremendous consolidation in 25 years.” 

Tyson Foods is by far the largest

processor, with 42 plants in 17 states,

65,000 employees and 7,000 contract

farmers, she said. Gold Kist, a cooperative, is a distant second, with 12 plants

in five states. 

Clouse said the current economic

structure keeps producers at the mercy

of the poultry companies. It costs about

$125,000 to build and equip a modern

poultry house, which will provide an

average income level of just $4,000 per

year. About 76 percent of poultry growers earn less than $29,000 per year, and

45 percent earn less than $14,000 annually. She said more than half of poultry

growers fall under the federal poverty

level—based on a family of four that

depends on poultry alone for income

(and she said many do). 

Ranking of growers for pay by

processors is done by a process they

call a “tournament.” But Clouse said

growers believe these pay tournaments

force growers “to play in a game

where everyone gets different equipment and with no referee. The poultry

processors control all the inputs, tell

them how to grow birds, decide when

to take birds, and when to bring feed.

The company decides whether to continue to use your facility and any dispute resolution method.”

With the switch in most contracts to

binding arbitration between the company and individual growers, farmers have

lost their access to the courts. Some

cases are still going to court anyway,

with producers claiming the contracts

Contract poultry growers are still trying

to forge an effective national bargaining

association. USDA photo
Rural Cooperatives / July/August 2002 29

were signed under duress, Clouse noted. “We hope state and federal laws will

set higher standards for contracts,” she

said, noting that it “may take a combination of forces to bring this about.” 

Clouse was a founding member of the

National Contract Poultry Growers

Association (NCPGA) in 1990, and

worked as a field organizer in the South.

She started a newsletter that at first went

to 250 farmers, but within two years

went to 10,000 farmers. Fear was so great

among producers who attended early

organizational meetings that some

attended wearing disguises and under

aliases, she recalled. The co-op was chartered in Arkansas in 1990, and was in 16

states by 1992. Its early efforts included

offering group insurance and equipment

buying programs to members. 

Early NCPGA successes

crushed by new contracts

After success in those early years,

the industry decided to “lower the

boom” in 1994, Clouse said. Processors

called in all contracts in Alabama

(where the association had its largest

number of growers) and then issued

new contracts with binding arbitration.

“The 40 members who refused to sign

it got no more birds,” she said, noting

that 11 of those growers are still

involved in litigation against the companies. Thirty of its leaders were

forced out of business or “intimidated

into leaving the organization. This had

a chilling effect on the rest of the organization. Growers were frightened

back into the woods,” she said. 

“Fear still rules the roost,” Clouse

continued, noting that many producers

are afraid to promote a stronger bargaining cooperative for fear of reprisals

by processors. She painted a grim picture punctuated by cases of poultry

farmers who have committed suicide

over economic desperation—and even

one murder where a producer shot and

killed a company production manager

and then killed himself.

As it stands today, producers should

be treated as company employees, not

independent suppliers, because the reality is that they are piece-wage producers

under near-total control of the processors, Clouse said. “Our course of action

now is to get protections first—we’re

not trying to organize a big, bulky organization.” She said efforts are concentrating on regaining access to courts and

connecting with other producer groups. 

“Our farmers like what they do—

they feed the country; they don’t want

to ruin the industry or drive it offshore,”

she said. Clouse noted that “chicken can

be grown anywhere,”and said China is

building “huge feed mills” to expand its

poultry industry. Country-of-origin

labeling will help the domestic industry,

she said, stressing that consumers prefer

U.S.-raised meat. “But if companies

leave the U.S., what’s to stop farmers

from starting their own plants?” 

Clouse said producers are finding new,

non-traditional allies in some consumer,

environmental and church groups.

U.S. cattle industry

regaining lost markets 

Paul Hitch, a Guymon, Okl., feedlot

operator who helped launch the Consolidated Beef Producers bargaining

cooperative, said to regain lost markets,

the cattle industry needs to look to the

poultry industry and the way it markets

consumer-driven products. 

Cattlemen look back at the 1970s as

the good old days for their industry,

Hitch said. In those days, John Wayne

was still the nation’s idea of a movie

star, big belts, buckles and western hats

were all the rage and, he continued,

“beef was king of the meat case while

chicken was just a commodity that cattle producers paid little attention to.”

Flash forward to 2002, and beef has

lost its crown to chicken, which is

increasingly sold under brand names

“while beef is just a commodity.” 

“We forgot about the people who ate

beef and didn’t want to spend six hours

making a pot roast. The poultry people

did not forget the consumer, and so

they started selling breaded, boneless,

skinless, microwavable chicken in every

cut imaginable.” By about 1970, the

beef industry had begun experiencing a

two-decade-long erosion of market

share. “We were marching down the

road—if not to oblivion— at least to a

position of less significance.”

Cattle producers, he said, should

have been thinking of themselves as

beef producers first, not cattlemen.

“The person who eats beef is our king

and queen. They want consistent-quality products that are easy to prepare in

a short period of time. And if you don’t

give it to them, somebody else will.”

The pork industry has been quicker

than the beef industry to emulate the

marketing success of the poultry

industry, Hitch said. But the beef

industry is finally heading in the right

direction. In addition to offering

leaner, more consistent beef in a

greater variety of easy-to-cook cuts,

Hitch said branded beef products are

becoming more common.

As a result, beef has increased its

market share by 5 percent in the last

couple of years. 

So, with the beef industry heading in

the right direction, the challenge for

ranchers and feeders is to make sure they

can supply the type of beef needed to

sustain and expand these market gains

and to earn a fair return for their efforts. 

Hitch said that means moving away

from cash markets, which “worked

well as long as there were lots of sellers and buyers dealing in a non-differentiated product.” But with the

numbers of feeders, packers, ranchers

and retailers contracting more and

more, he said the situation has

changed dramatically. 

Beef packing concentration

sparks need for co-ops

The top four beef companies in the

United States now control 80 percent

of beef packing in the nation. The top

seven retailers control 45 percent of all

beef sales to the public, and that is

expected to climb rapidly to 75 percent, Hitch said. 

He noted that some say this concentration is the result of a “conspiracy” to

take control away from farmers and

ranchers, but Hitch said this process is

really just the result of basic market

forces at work. 

continued on page 39
30 July/August 2002 / Rural Cooperatives

By James Baarda

USDA/RBS Ag Economist 

james.baarda@usda.gov

Editor’s Note: This is the first of a

three-part series about cooperative boards of

directors. This article identifies the sources

of authority for boards and describes seven

basic responsibilities imposed on every cooperative board of directors. The next article

discusses the legal standards directors must

meet and outlines practical ways directors

can protect themselves as well as the cooperative. The last article describes the numerous special difficulties faced by cooperative

directors and shows why a cooperative

director’s task is more difficult than for

directors of other organizations. 

eing a director of a cooperative isn’t easy. In fact,

it is harder to be a good

cooperative director than

a director of almost any

other organization, including the largest

corporations in the country. Cooperative directors make decisions that aren’t

required in a non-cooperative corporation, and bad decisions can hurt the

cooperative and all of its members.

Frequently, directors just have too

little information about what they need

to do as directors. Information that is

available to help them become excellent directors is often not appropriate

for cooperative directors. Often, advice

is so general it isn’t applicable and

some is so specific that it cannot be

applied easily. Advice and information

may not focus on the real issues and

sometimes the advice is conflicting.

The three articles in this series certainly don’t give all the answers. However, existing information related to

cooperative directors, as well as the

directors of other kinds of organizations, can be distilled and focused for

cooperative director use. Concise

guidelines are given that can be tailored

to the needs of individual directors on

the boards of a specific cooperative.

This article identifies authority that

gives directors the rights and responsibilities to carry out their work as directors on behalf of the cooperative and its

members. Then it describes the seven

basic responsibilities imposed on all

directors of all cooperatives: the “circle

of responsibilities.”

Board authority

What gives a board of directors its

authority? The basic authority, and the

ultimate statement of responsibility, is

imposed by law. Statutes under which

cooperatives are incorporated identify

the board of directors as the key institution responsible for the direction and

management of the cooperative. A typical cooperative statute says: “The

affairs of the association shall be managed by a board of not less than five

directors, elected by the members or

stockholders from among their own

number.” Variations exist, of course,

among statutes and states, but the

theme is always the same: the law

places a cooperative’s management and

guidance in the hands of its board of

directors.

The statutory mandate is broad but

isn’t described in further detail by most

statutes. This is one reason that further

explanation is needed to make the directive meaningful. An added source of

guidance is a cooperative’s own bylaws.

The bylaws are not the place to give

detailed descriptions of what the board

is supposed to do, and bylaws typically

do not. However, in describing certain

processes and actions of the cooperative,

bylaws often identify decisions the

board must make on specific issues.

Some of these will be described when

board function and personal responsibilities are noted in the next article in this

series and—even more so—when special

issues are described for directors in the

final article. The problem faced by

directors (who represent members)

when members want something that

will be detrimental to their cooperative

(to whom directors also owe a duty) is

also noted in the final article.

Finally, the board will establish its

own internal structure, rules and operations to supplement the broader statements in the statutes and the bylaws.

These cannot remove or diminish the

responsibilities imposed by statute, but

can create a framework in which the

overall responsibilities and authority are

useful in the everyday work of the board.

These are the technical sources of

authority. The ultimate authority,

though, comes from the cooperative’s

members. The cooperative is theirs, and

without members’ desire to create and

perpetuate the cooperative, the board

would not exist. Members place their

trust, their needs, and authority in a

board of directors of their own choosing.

Circle of seven responsibilities

Despite significant differences

among cooperatives in the United

Co-op boards’ circle of

responsibilities

B

MANAGEMENT TIP
Rural Cooperatives / July/August 2002 31

States in size, function, complexity,

organizational form, financing methods

and membership makeup, it is possible

to summarize a “circle” of seven

responsibilities applicable to all cooperative boards of directors. Of course,

each of the responsibilities will be carried out differently depending on the

cooperative, but fundamentally the circle of seven responsibilities describes

all cooperative boards of directors.

1. Board represents cooperative

members

Cooperatives are created and operated to serve members’ needs. Members invest in the cooperative, they

patronize it and they exercise ultimate

control of the cooperative. The board

of directors is the means by which the

needs and desires of individual cooperative members are incorporated into

the cooperative. In some circumstances, of course, members vote

directly on a cooperative issue. But for

the most part, members are represented by the board of directors. 

Directors are elected by members

and directors’ role is to represent those

members. To represent members effectively, directors must know what members need. They also assess the cooperative’s capabilities to meet those needs.

Directors must understand the

strengths and weaknesses of the cooperative and make judgments based on a

thorough understanding of the cooperative’s resources and its employees so

they can be used to the members’ best

advantage in a successful cooperative.

2. Board establishes cooperative

policies

Directors put their

member representation

role into effect by making

policy. Indeed, many discussions about cooperative directors summarize

the board’s job as establishing cooperative policy.

Policies may be broad

and long-range or they

may be specific and

immediate. Both are necessary. If the board fails to

establish cooperative policy, either someone else

will establish the policy

or the cooperative will

operate without direction

and control. In either

case, the cooperative cannot be successful and disaster is likely to follow.

3. Board hires and supervises management

Directors do not run the cooperative

themselves. Employees are used to do

the work necessary, given policies the

board has established about the purposes of the cooperative and specific policies guiding cooperative operations.

The board hires and supervises management. Normally, direct involvement by

board members is limited to only top

management, but the board’s responsibility does not end with the employment of a chief executive officer. Supervisory responsibilities vary according to

structure and circumstances.

4. Board is responsible for acquisition and preservation of cooperative

assets

Cooperatives acquire and use assets

to serve patrons in one way or another.

An overall responsibility of the board is

to establish policies with respect to

acquisition and preservation of the

cooperative’s assets. Cooperatives are

entrusted with other people’s money

and must account for it at all times. The

assets of a cooperative were purchased

with member money, and the cooperative is obligated to those members.

This board responsibility is shown

in two specific obligations. First, the

board is responsible for guaranteeing

that the cooperative establish and use

accounting systems that keep track 

of all aspects of the cooperative’s

finances and resources. The accounting system must also accurately

reflect the true financial condition of

the cooperative.

The second obligation is that the

board monitor the cooperative’s financial performance and establish policies

that protect the cooperative from

financial shocks and risky situations

that undermine its financial health.

Proper audits and careful board

response to audit reports is the first

step towards meeting this responsibility, but a range of board decisions can

spell financial success or failure.

Whether financially related policies are

short-term or long-term, the board of

directors has the ultimate responsibility for

the cooperative’s financial affairs.

It is clear that these

responsibilities require

a great deal of care,

attention, and skill by

each member of the board. Board

members must understand what a

financial reporting system is, what it

must do, and what financial information can and cannot tell directors

about the performance of the cooperative and its management.

5. Board preserves the cooperative

character of the organization

The board, as the policy-making

body and representative of the cooperative’s members, is responsible for

maintaining the special character of the

cooperative. If the cooperative is

General definitions:

Responsibilities: What boards of directors must do to

meet their obligations to the cooperative under laws

and other guiding sources.

Standards of conduct: Sometimes called duties, standards specify how the responsibilities must be carried

out. They impose standards of conduct on the board

and individual director board members.

Liabilities: These are consequences when directors

fail to carry out required responsibilities with the

required standards of conduct. Liability may be

imposed on the cooperative or individual members

of the board.

Boards of directors and management often struggle

with the division of duties, supervision, and operational detail between the board and management.

This issue can be detrimental to the cooperative if

conflicts are not resolved satisfactorily.
32 July/August 2002 / Rural Cooperatives

allowed to deviate from principles to

the extent that it is no longer a cooperative, the directors have failed in this

responsibility. This can be a breach of

the trust that members have placed in

the board, and in some cases it can be a

violation of law.

At the same time, the board appreciates that a wide range

of operating methods

and structures is available to cooperatives.

Preserving cooperative

principles doesn’t mean

that the cooperative is

either small or simple.

It only means that the

fundamental character

of the organization is

that of a cooperative

regardless of size or

complexity.

The responsibility imposed on the

board to preserve the cooperative

character of the organization means

that the directors must know what that

character is, how it operates in the

structure of their organization, and

what kinds of events and actions may

undermine cooperative fundamentals.

6. Board assesses the cooperative’s

performance

Every organization evaluates its performance to assess the policies and

actions taken during the year and to plan

effectively for the future. For cooperatives, performance rules are not identical

to those that generally apply to other

types of businesses, although they are

deceptively similar. A cooperative is

indeed concerned with the “bottom line”

and its success as measured by financial

criteria, but it is not organized to simply

benefit itself. The cooperative’s performance is ultimately measured by the

benefit it confers on those who use it.

Performance is judged by the cooperative’s fundamental objectives. 

This may be accomplished in differing ways, as no single standard of measure is available to the board. The board

is faced with multiple criteria, and some

may be conflicting. Some criteria may

be measured in numbers, and some cannot be measured by any financial documents. Despite the variations, the board

must keep its eye on the cooperative’s

ultimate goals, make careful assessments

of performance and strategies, establish

appropriate policies, and make hard

decisions on behalf of the members.

7. Board informs members

Cooperative boards of directors

inform members about the cooperative

organization—the members’ own business. This duty is rather unique among

businesses in its importance and implications for member control. 

Without accurate information,

members cannot make decisions about

their cooperative and will not be prepared to make decisions imposed on

them as cooperative members. Members will not be able to understand

whether their cooperative is successful,

or whether basic changes must be made

to correct problems identified by the

board. And without accurate and complete information, members will not be

able to make judgments about cooperative management or about the board’s

own performance. 

Member information completes the

directors’ “circle of responsibility”

leading to member representation. ■

This may be one of the most misunderstood and

neglected of directors’ responsibilities. In most situations, it does not require specific action on the part of

the board, but only if the proper safeguards have been

established and are in place for all to see. A periodic

review of the cooperative along with established policies and rules requiring operation on a cooperative

basis are essential. But nothing gives the cooperative

as much protection as an articulated dedication to

cooperative principles understood by the board, the

members, and management.

Implementing exercise

At your next board meeting, consider conducting a complete assessment of

sources of the board’s authority, including statutory requirements, bylaw provisions, policies, board structures or another source of board authority.

• What is the source of the authority?

• What does it mean for the everyday operation of the board?

• Does the board fully appreciate its authority—and its limits?

• How can the board respond better to the authority it is assigned?

At each of the subsequent seven board meetings, thoroughly consider one

of the responsibilities listed.

• What specifically does the board currently do to meet the responsibility?

• What are the weaknesses in the board regarding its responsibility?

• Does each director have the skill, interest, and time to consider and respond to the

responsibility?

• Does the board have the knowledge and information necessary to meet each

responsibility?

• What specific steps can be taken to make the board meet every responsibility?

• Is there a consensus on the board’s performance?

• Would members agree with the board’s self-assessment?

The most effective way to make the responsibilities “up close and personal”

is to have each director individually address the issue and propose his or her own

solution to problems perceived about the responsibility under discussion. Board

meetings or ancillary sessions to board meetings can then provide the forum for

discussion within the board. These sessions may be more effective if management is not present.
Rural Cooperatives / July/August 2002 33

Western Sugar Co-op pays 

$85 million for six plants 

Sugar beet growers in four western

states have seized control over a major

segment of the U.S. sugar industry

with the launch of Western Sugar

Cooperative. The cooperative was born

at the end of April after 2 years of difficult negotiations by its predecessor,

Rocky Mountain Sugar Cooperative.

The talks finally culminated in a deal to

pay $85 million for six sugar beet processing plants, storage facilities and a

host of other support facilities and

equipment belonging to Tate & Lyle

North America. The new cooperative

will also assume payment of the $100

million inventory debt to the Commodity Credit Corporation. 

Not even a deep freeze in early May

that impacted 20 percent of its members’ acreage could deter the start of

the new co-op. With seed supplies

ample, growers moved quickly to

replant the 30,000 lost acres. Crop

planting had already been delayed by

drought conditions in much of its territory: Nebraska, Wyoming, Colorado

and Montana. 

The drawn-out negotiations went

through three agreements and five previous closing dates before a final settlement was reached. To maintain market

identity, the cooperative adapted the

name of the old company.

Tate & Lyle had owned the plants

since 1985, when it purchased them

from the bankrupt Great Western Sugar Co. Efforts to complete the sale had

been stymied in recent months, partly

because capital markets had been affected by the Sept. 11 terrorist attacks and

the national economic recession.

Two USDA Rural Business-Cooperative Service programs played a key

role in financing the sale. Through

USDA’s Cooperative Stock Purchase

Program, more than 480 growers

financed their purchase of $200-peracre equity stock in the co-op. That

guaranteed $10 million in Wells Fargo

bank loans to cover the producers’

equity. The bank will share the investment with a dozen banks in the participating states after closing loans for the

growers. USDA also provided the coop with $14 million in Business and

Industry Program loan guarantees. 

Initially, 143,500 acres were committed to the cooperative and more are

expected, now that the purchase has

been completed. Growers earlier had

been assured of a contract for the 2002

season regardless of who would own

the firm. So, despite the extended

negotiations, sugar beet planting

moved ahead as quickly as weather

conditions in the region permitted.

Meanwhile, Inder Mathur, a former

chief financial officer for Western Sugar Co., has been named chief executive

officer of the new cooperative, according to Rick Dorn, board president and

a sugar beet grower from Hardin,

Mont. He said Mathur would be a

good match for the cooperative

because “he knows the system and has

the respect of other employees.” Dorn 

said he was “delighted that the growers

now own Western.” He said the new

farm bill will “bring stability to our

industry and contribute to our success

as owners.” He invited all area growers

to “join with us in building a strong

cooperative for our own benefit.”

Frank Bush will continue as marketing director for the new Western Sugar.

Key management staff are being

retained at all six plants. The Denverbased cooperative will operate all the

plants this season. They are located in:

Scottsbluff and Bayard, Neb.; Billings,

Mont.; Lovell, Wyo.; and Fort Morgan

and Greeley, Colo. After this season the

co-op will assess the future of each plant. 

Simultaneously, grower- and community-based groups have been negotiating the purchase of Holly Sugar

plants at Torrington and Worland,

Wyo. The growers would operate as

limited-liability companies. Torrington is on the Wyoming-Nebraska line

and near the new Western Sugar

Cooperative’s refinery at Scottsbluff,

Neb. Holly’s parent, Imperial Sugar,

has reorganized after earlier declaring

bankruptcy and earlier this year sold

sugar plants in Michigan to a new

cooperative. 

Dakota Pasta co-op

converts to corporation

Members of Dakota Pasta Growers Co., widely looked to as a successful model of a new-generation

cooperative, have voted 693-146 to

convert from a cooperative to a regular corporation. Some observers say

the vote reflected the reality that the

member-farmers who own the business were no longer supplying the

majority of durum to the plant, raising legal and tax questions about

whether it could continue to operate

as a cooperative. As a corporation, it

need not get the majority of its

durum from members, and it will be

able to sell stock to the public. 

Board Chairman Jack Dalrymple,

NEWSLINE
also North Dakota’s lieutenant governor, said that with the change the business will seek new stockholders to raise

additional funds. “This (conversion) is

about this business and is in no way a

referendum on the cooperative structure,” Dalrymple told the Associated

Press. Critics of the move say they will

be watching to see if farmers can maintain long-term control of the business

now that it has converted. 

With processing plants in Carrington, N.D., and New Hope, Minn.,

Dakota Pasta has 115 employees and is

the third largest pasta maker in the

United States, processing about 1.5

million pounds daily. Farmer-members

will no longer be required to supply

durum to the company, although they

will still hold a special class of stock

that gives them preference in selling to

their former co-op. 

Raymond Crouch, DFA editor,

killed in Texas airplane crash

Raymond Crouch, director of member publications and media relations

for DFA, was killed May 20 in the

crash of a light aircraft near

Stephenville, Texas. Also killed in the

accident was the pilot, Kelly Wilson,

43, a Tarleton State University professor. Crouch, 54, was taking aerial photos for an article for an

upcoming issue

of the DFA

“Leader” newspaper, of which

he was editor,

when the Beech

Bonanza 35 aircraft went

down. 

“This is a

profound loss

for the dairy industry, his family and

his friends,” said Agnes Schafer, DFA’s

executive director of corporate and

public relations. “Raymond was passionate about farmers working

together in the marketplace for a better future, and used his love of the

printed word and the photographic

image to communicate the stories of

the American dairy farm family.”

Crouch’s roots were in the dairy

industry, and he spent most of his life

working for it. He was born into a

dairy family and grew up in Denton,

Texas, where he began his career as a

photographer and writer for the Denton Record Chronicle. He later worked

in the banking industry before becoming communications director for the

Southern Region of Associated Milk

Producers Inc., where he remained for

nine years. When AMPI merged into

DFA, Crouch moved to Kansas City

and took the position with DFA. He

won numerous professional honors for

both his writing and photography, and

a number of his photos have appeared

in this magazine. 

Canadian dairy co-op buys

Indiana cheese plant 

Agropur cooperative, the most

important Canadian cheddar cheese

producer and a leading manufacturer

and distributor of cheese, is making its

debut in the U.S. market with the purchase of the Deutsch Käse Haus Inc.

(DKH) cheese plant in Middlebury,

Ind. DKH mainly markets colby, colby-jack and pepper-jack cheese. The

plant operates in the heart of an Amish

community which provides the milk

supply and labor force. Agropur is

owned by 4,700 dairy farmers and

employs more than 3,100 people.

Resource library for co-ops

dedicated at DC University 

A resource library for cooperatives

on the campus of the University of the

District of Columbia (UDC) in Washington, D.C., has been dedicated to

C.H. Kirkman, Jr. Kirkman served as a

senior cooperative education specialist

for 31 years and worked on many

cooperative programs while with

USDA’s Agricultural Cooperative Service (now part of USDA/RBS). He

retired in the 1980s. Last year, he

established an endowment to support

the center. 

The library was established in 1996

by Kirkman and UDC officials to

support cooperative education and

research efforts of the university by

providing a repository for research

and reference materials related to the

history and aims of agricultural and

consumer cooperatives and their associations. He and family members

donated funds to establish the library.

Both he and USDA contributed

books and other cooperative information materials. This is the first such

library on the East Coast and third in

the nation.

Australian Farley 

to lead Calcot 

The board of Calcot Ltd., one of the

world’s oldest and largest cotton marketing cooperatives, has chosen David

D. Farley, 45, an Australian farm executive, as CEO and president. Farley,

only the fifth CEO in the history of the

co-op, succeeds Tom Smith, who had

been president since 1977. Farley will

work with Smith through the end of

September and then assume full duty

on Oct. 1. Smith

will continue as

a consultant for

a year. 

Board Chairman Bruce Heiden said Farley

would bring “an

outside perspective and

energy that

should be of

great benefit to

the continuation of successful marketing of members’ cotton.” Farley is

the former chief executive officer of

Colly Farms in Australia, the largest

vertically integrated cotton buyer,

ginner and marketer in the country.

He brings a wealth of experience to

the cooperative. Farley said he

expects to spend his first four months

meeting growers, gin managers and

buyers of the cooperative’s cotton.

He said he would look for ways to

return growers to profitability, which

will benefit both the cooperative and

the cotton industry. Calcot, Bakersfield, Calif., has annual sales of 1.4

million bales of cotton.

34 July/August 2002 / Rural Cooperatives

Raymond Crouch

David Farley
Rural Cooperatives / July/August 2002 35

Bio-based, renewable energy products 

featured at USDA Earth Day event

USDA celebrated Earth Day with a product showcase of bio-based and renewable energy products. The

show, held in the courtyard of the Department of Agriculture headquarters in Washington, D.C., featured

more than a dozen manufacturers of a wide variety of

bio-based and renewable products. The event not only

demonstrated the adaptability of U.S. crops for Earthfriendly products, but also provided an opportunity for

federal purchasers to learn more about the products. 

“American farmers—unmatched in the world for

their productivity of food and fiber—are now producing

bio-based products that will do everything from fuel our

cars to provide Earth- safe solvents to clean our homes

and factories,” said Michael Kossey, the show coordinator and special projects manager for USDA’s Rural

Utilities 

Service. 

One of the

featured

exhibitors

was Natural

Plant Products of

Salem, Ore.,

a cooperative of 85 turf

grass growers. Many

turf growers

in the Northwest also

grow meadowfoam, a herbaceous annual wildflower

that yields an oil with a unique, fatty-acid composition

that has been used since the mid-1980s by the cosmetics and personal-care products industry. The co-op,

formed in 1982, expanded rapidly in the mid-1990s,

recruiting new members to help meet demand that was

growing at 15 percent per year. As a result, acreage

shot up from 2,000 to 8,500 acres.

But—in a process that many growers know all too

well—the industry is now in an over-supply situation,

which has the co-op and others looking for new uses

for meadowfoam. One of the most promising uses—on

display at the USDA Earth Day event—is meadowfoam

meal, a pelletized product which has been used successfully in the nursery industry as a fertilizer and as a

protectant against weeds. Other uses being studied for

meadowfoam oil, which is highly stable, include as an

additive in hydraulic and motor oils.

Other exhibitors at the event included:

• United Soybean Board—provided information

on a wide

variety of

products

made from

soybeans,

grown by

600,000 U.S.

farmers.

These new

products

include soybased lubricants, wood

adhesives,

printing inks,

solvents, building composite materials and paints,

among many others.

• Urethane Soy Systems Co.—This Illinois firm is

developing uses for soybean oil- based polyurethane,

which is used in the manufacture of carpeting, furniture

upholstery, auto body parts and many other products.

The South Dakota Soybean Processors cooperative in

Volga, S.D., is its exclusive supplier of crude soy oil (see

article, page 19). 

• Gemtek Products—This Arizona company is

producing bio-renewable cleaning products—including

degreasers, solvents, lubricants and odor neutralizers—sold under the motto “safely cleaning planet

Earth.” The company’s products are used for everything

from removing graffiti on buildings to metal cleaning in

the aircraft industry and as an odor neutralizer in meat

processing plants and paper pulp mills.

• EarthShell Corp.—Disposable plates and bowls

made from natural ingredients, such as limestone and

potatoes, are the specialty of this Maryland-based company. All products are 100 percent biodegradable, yet

rugged in use and microwavable. EarthShell also make

cups and sandwich boxes. Its products are already

being used in 90 Walmart stores on the West Coast, in

several national parks and universities, says John

Nevling, director of product management. 

• Eco Film—the Cortec Corporation of St. Paul,

Minn., produces degradable film used in the manufacture of garbage and mulch bags, grocery bags, toy and

parts packaging, export packaging, etc. ■

The United Soybean Board showed off a

wide array of soy-based products at

USDA’s Earth Day product show. USDA photos by Dan Campbell

Taylor Oldroyd (right), USDA Rural

Development public affairs director, checks

out some bio-renewable cleaning products.
tection for sharing market information

provided by Section 5 of the Cooperative Marketing Act of 1926.

Subchapter T Tax Treatment—

The Wyoming law is written so an

entity it authorizes can receive singletax treatment without having to meet

the qualifications for “operating on a

cooperative basis” under Subchapter T

of the Internal Revenue Code. Proponents of the law applied for and

received a letter ruling from IRS that a

company formed under the law qualifies for single tax treatment as a partnership under Subchapter K, rather

than as a cooperative under Subchapter

T. This process was completed before

the law even took effect.

Security Exemption —The Securities Act of 1933 exempts farmer cooperatives qualifying for 521 tax status from

its registration and prospectus requirements. Only farmers’ associations qualify for 521 tax status. If a Wyoming Processing Cooperative has non-producer

investors, it is questionable whether it

can qualify for 521 tax status, a necessary prerequisite to be eligible for the

exemption in the ‘33 Securities Act.

Borrowing from CoBank—The

Farm Credit Act and Farm Credit

Administration regulations bar CoBank

from making loans to marketing cooperatives that have more than 20 percent

of their voting power in the hands of

non-producers or are authorized to pay

dividends on member capital that

exceed 10 per cent per year. Thus, it is

questionable whether an association

organized under the Wyoming law that

gives more than 20 percent of the voting control to investor “non-producer”

members or permits returns on member equity of more than 10 percent is

eligible to borrow from CoBank.

The Agricultural Marketing Act

of 1929—This Act is the only federal

statute of relevance that purports to

define the term “cooperative.” The definition is patterned on the tests set out

in Capper-Volstead. To qualify, an association must, among other things, be

composed of “farmers” and must either

not permit a member to have multiple

votes based on equity, or limit returns

on equity to 8 percent. While the definition is no longer used for its original

purpose, to describe an entity eligible to

borrow from the Farm Credit System,

it has been incorporated by reference

into several other laws that benefit

cooperatives. It is the test to qualify for: 

1. The protections against handler

coercion and discrimination in the

Agricultural Fair Practices Act,

2. The cooperative exemption from

the registration requirements of the

Securities Act of 1934,

3. The cooperative exemption from

the trust provisions of the Perishable

Agricultural Commodities Act,

4. The cooperative exemption from

trucking regulation under the Interstate Transportation Act.

Taken together, all of these statutes

reflect a consistent pattern of Congressional recognition that a cooperative

operates within certain prescribed limitations. Cooperative leaders need to

consider the implications of a state

statute authorizing the formation of

cooperatives that may not qualify

under any of these federal laws.

Unfortunately, simply suggesting the

Wyoming Processing Cooperative Law

goes too far in discarding cooperative

tenets doesn’t solve the bigger problem

that it was intended to address: What

must be done to ensure that entities

owned and controlled by their memberusers, and operated for the benefit of

those member-users, cannot only survive, but thrive in the years ahead?

Some serious thought and discussion are needed as to how to build flexibility into the cooperative model without destroying the unique features that

justify favorable public policy treatment. Let these comments serve as a

challenge to all cooperative leaders to

begin thinking about how the cooperative of the future must to be organized

and operated to meet the needs of

tomorrow’s member-users.

Randall E. Torgerson, Deputy Administrator, USDA Rural Business-Cooperative Service

36 July/August 2002 / Rural Cooperatives

Davisson heads CF Industries 

The new chairman of the board of

CF Industries Inc., the Chicago-area

based fertilizer manufacturing and distributing cooperative, is Bill Davisson,

chief executive officer of GROWMARK Inc., Bloomington, Ill. He

succeeds John Gherty, president and

chief executive officer of Land

O’Lakes, Inc., whose term expired.

Both regional cooperatives are among

nine U.S. and Canadian farm supply

cooperatives that own CF and secure

fertilizers from it. Through thousands

of member-owned sales outlets of

these cooperatives, CF’s nitrogen and

phosphate fertilizers reach more than

1 million farmers and ranchers in 48

states and the Canadian provinces of

Ontario and Quebec. 

Moser joins LOL board 

Bobby Moser, vice president of agricultural administration and university

outreach executive dean of the college

of food, agricultural and environmental

sciences at the Ohio State University,

has been named as an advisory member

to the Land O’Lakes board of directors. LOL Chairman Jim Fife said it

was a tribute to the $6 billion dairy

cooperative to gain an advisory member of Moser’s stature.

SV buys Rochester Cheese

Rochester (Minn.) Cheese Co., with

plants at Spring Valley and Delbo,

Minn., has been purchased and will

become a wholly owned subsidiary of

Swiss Valley Farms, Davenport, Iowa.

The Rochester headquarters facility

includes a cold storage warehouse. The

company ages, grates and customblends cheese for food companies

nationwide and packages parmesan and

Commentary continued from page 2
Rural Cooperatives / July/August 2002 37

romano cheese for retail and ingredient

markets. The firm’s annual sales are

about $100 million. Gene Quast, Swiss

Valley CEO, said the expansion effectively broadens the cooperative’s line

and enables it to offer a complete line of

quality dairy products to its customers.

Montana elevator, long trains

boost farmer wheat prices 

Mountain View Co-op’s new $6 million grain elevator and the 110-car

trains it accommodates are bringing

farmer-members another 8 to 10 cents

per bushel for the wheat they sell to the

cooperative at Collins, Mont. The

facility’s 800,000-bushel capacity is

enough to nearly fill a couple of the

long trains. Better still, the train can be

loaded by a crew of only three, instead

of the 12 workers the job would take at

a standard elevator. The first loading

took only 13 hours vs. the standard two

days. Manager Bruce Clark said he

hopes to cut the time to just nine

hours. The lure is a $400-per-car

freight discount, prompting a number

of these super elevators to appear

across Montana. 

Similarly, in North Dakota, Kindred

Grain and Oil has merged with Cenex

Harvest States at West Fargo, leading

the way for construction of a multimillion dollar elevator at Kindred to

accommodate 100-car trains. ElseRural Survivors continued from page 19

bushels per day and has made investments to move further up the valueadded chain. 

“Vision is important, but it is the execution of that vision which is most crucial,” Christianson said. “My farmers

chose to be in businesses that was a commodity—to be a low-cost producer in an

industry where the top four companies

crush 75 percent of the crop. It’s a very

consolidated industry. So it would be

foolish to come back three or four years

later and cry about how hard it is to compete with big companies.” But Christianson said he has heard other new-generation co-op leaders say they are upset that

the large companies “are coming after us.

If you don’t want to play with them,

don’t put your business plan there.”

The SDSP board passed a resolution that the co-op have no more than

a 104 percent ratio of debt to equity. At

that time, the ratio was 114 percent,

but it has since been lowered to 35 percent. Another target was to pay 70 percent of value-added patronage in cash.

None was paid in the first year, but in

the next four years the payment was 80

percent in cash, dropping to 70 percent

last year—a record profit year. 

Christianson said SDSP has studied

its industry carefully to determine the

best course for the future. The fiveyear vision included boosting capacity

to 100,000 bushels per day, to generate

60 percent of revenue from valueadded activity, to vertically integrate

toward end customers and to create

partnerships and strategic alliances that

“forge win-win relationships with other

producer groups.” 

A major result of the direction is a

new strategic alliance with Urethane Soy

Systems of Dover, Ill.—which Christianson described as a small, private company, trying to substitute soy oil for petroleum-based oils in the manufacture of

polyurethane. The goal will be to make

SDSP a major supplier of soy-derived

polyurethane for carpet padding, furniture upholstery, car bumpers, etc. 

It’s a 4.6-billion-pound market, he

said, and by 2007 SDSP hopes to have

an 850-million pound share of it. Soy

oil saves 5 to 30 percent of the cost of

petroleum-based polyurethane, he said.

The co-op has filed for a patent on a

process it will use to process crude soybean oil into poly-oil.

SDSP is also working with Minnesota Soybean Processors—a 2,330-member co-op—to build a new soybean processing plant in Brewster, Minn., which

they hope to have operating in 2003.

SDSP will provide management and

marketing for that operation. 

SDSP is considering converting to a

limited liability corporation, but will

continue to operate “with the same

operating principles as a co-op,” he said. 

Christianson, quoting business consultant Danny Cox, summarized the

process of launching successful valueadded enterprises: “dream, study, plan,

take action.” ■

In recognition of GROWMARK’s 75th anniversary of service to local cooperatives and their farmer-members, Future Farmers of America members from Normal, Ill., plant trees on the farm of Dan Kelley, chairman of the regional cooperative’s board. The tree planting symbolizes faith in the future of America and

was conducted in conjunction with the cooperative’s participation in the Illinois

Buffer Partnership program, part of the Trees Forever organization. Photo courtesy GROWMARK. ■
38 July/August 2002 / Rural Cooperatives

where, an elevator and two miles of

sidetrack are under construction at

Highmore, N.D., and should be ready

for the fall harvest season. The unittrain facility will be served by the

Dakota, Minnesota and Eastern Railroad. CHS Cooperatives and the local

Farmers Union Co-op elevators at

Kennebec, Reliance and Chamberlain

are participating in the project. 

Fla. timber co-op formed;

poplars focus of Minn. co-op

A handful of small timberland owners in Florida have formed a cooperative to help cope with a depressed timber market. Similarly, a small farmer

cooperative in west-central Minnesota

is looking to make hybrid poplar trees

part of its members’ cash crop mix. 

In Florida, trees on co-op members’

land were dying, rotting and being

infested by the southern pine beetle.

Five members signed a contract with

Harrington Logging Inc., of Brewton,

Ala., and sold timber from 142 acres in

Oskaloosa and Walton Counties. Extension agents in the two counties even

pitched in to help form the cooperative.

Almost immediately, landowners got 50

percent more money per ton than if each

had dealt separately with the industry. 

A contractual clause specifies what

type of harvesting equipment will be

used to ensure that the land would

remain in good condition and stumps

cut at specified levels. Some landowners have expressed interest in forming

another cooperative. Even the timber

companies are excited about the

arrangement because it saves them

time and travel between tracts and

makes scheduling crews easier. 

President Dennis Gibson of the

Minnesota Agro-Forestry Co-op, Benson, Minn., is encouraging members to

work on developing a market for farmraised, hybrid poplar trees and is hoping to attract the interest of venture

capitalists. That would require planting

enough acres of the trees to ensure a

steady supply for a prospective market.

The 40-grower cooperative was formed

in 1996. Members are encouraged to

plant hybrid poplars as windbreaks and

other conservation uses, with an eye

toward eventually harvesting a profitable tree crop. On his farm, Gibson

uses as mix of hybrid poplars and cottonwoods as windbreaks to reduce erosion and improve water quality. They

also boost corn and soybean yields by

reducing wind stress on them. 

NCB income hits $12.5 million;

Snyder to head NCBA board

Net income for fiscal 2001 reached

$12.5 million for the National Cooperative Bank (NCB) in Washington,

D.C., a credit source for many of the

nation’s non-agricultural cooperatives,

President Charles Snyder reported at

the bank’s most recent annual meeting.

The bank’s total capital hit $344.7 million and net

assets reached

$1.1 billion. The

bank is owned by

1,841 borrowercooperatives

throughout the

nation.

The bank

bestowed its

Stanley W. Dreyer Spirit of

Cooperation

award to the National Cooperative

Business Association’s (NCBA) dotCoop team for its efforts to propose,

develop and launch the new .coop toplevel Internet domain. Only cooperatives and cooperative support organizations are eligible to register names

under .coop. “Dot Coop will identify

and unify us as cooperatives on the

Heavy dept pulls Farmland into Chapter 11 continued from page 11

purchased SF Services in 1998.

An 11th-hour buyout bid for Farmland’s meat business by Smithfield

Foods Inc., the world’s largest hog

producer and pork processor, was

declined by the cooperative’s board.

Farmland rejected the offer after

receiving $306 million of debtor-inpossession financing from its lending

syndicate headed by Deutsche Bank

AG and including CoBank, Bankers

Trust Co. and Rabobank. Sen. Charles

Grassley of Iowa has since said he

opposed any deal between the firms

out of concern for too much concentration in the meatpacking industry. 

Farmland’s refrigerated foods unit,

which includes its beef and pork business, generated sales of almost $4.75

billion in 2001. Its fresh meat operations are the fifth largest in the

nation. Rather than focusing on owning livestock, Farmland has been

developing branded meat products

including case-ready offerings for

supermarkets.

Farmland is also attempting to sell

its petroleum refinery at Coffeyville,

Kan. After a 5-week shutdown for

repairs and improvements, the refinery

came back on stream for the spring

season. The regional cooperative’s

bankruptcy petition is expected to have

little effect on operations of its local

cooperative owners. If Farmland’s

stock is devalued, the locals could

write them off for tax benefit in the

current fiscal year. 

Harry Fehrenbacher, Illinois farmer

and Farmland chairman, earlier this

year told a Farmland Systems Conference in Scottsdale, Ariz., that the

cooperative was changing from a

commodity-based farm supply business with huge cycles and small margins to a more stable, high-margin

foods business, although “the transition is not complete as evidenced by

financial results of the past few years.”

He said,“We must position it (Farmland) to generate a return on your

equity investment...including the

foods business.” 

Terry indicated the cooperative’s

strong brand equity, leadership in the

meat business, $2 billion asset base and

support of its 1,700 local cooperatives

and their 600,000 farmer-owners

would help the cooperative emerge as a

stronger company. ■

Charles Snyder
Internet and around the globe,” Snyder

said. “It weaves together cooperation

and the communities we serve.” 

Snyder’s bank was one of the

founding members of dotCoop. He

was subsequently elected chairman of

the NCBA board, succeeding Pete

Crear. The bank has registered more

than 200 dotCoop addresses by 82

affiliated cooperatives and recently

revamped NCB’s Web site and

launched it under the new address:

www.ncb.coop. “For NCBA members,

cooperatives and communities nationwide, we have a special opportunity to

combine our forces to reach NCBA’s

bold goal of creating a strong, distinct

cooperative sector.” 

Kansas fetes Gwin, Williams

Two inductees, Francis “Fritz” Gwin

and James Williams, have joined the

Kansas Cooperative Hall of Fame.

Gwin was manager of Farmway Co-op

in Beloit and also served as chairman of

the board of Farmland Industries.

Williams, retired president of the

Wichita Bank for Cooperatives, devoted 27 years to providing credit services

to agricultural cooperatives while serving on the board of directors of numerous regional and national cooperative

organizations.

Extended courting pays off

It took 18 months of courting to ice

the deal, but New Vision Co-op at

Worthington in southwest Minnesota

recently shipped 75 railcars of soybeans—about 270,000 bushels—to an

oilseed crushing company in Jalisco

(near Guadalajara), Mexico. An agricultural merchandising firm that represents about 200 cooperatives in the

Upper Midwest helped arrange the

sale. The shipment marked the first

direct sale by Minnesota farmers to a

foreign customer under a state program promoting exports. 

Talks are underway for the sale of

more soybeans and possibly corn.

While the $1 million sale was big for

the cooperative, it was a small part of

the state’s annual total exports of $681

million in soybeans and soybean

products. Almost 2 years ago, Gov.

Jesse Ventura headed a trade mission

to Mexico and mutual visits followed

by Minnesota farmers and state agricultural officials from Mexico. ative

sector,“ Snyder said.

Illinois sheep co-op launched

Sheep producers in Illinois have

decided to pool their resources in an

effort to make more money through

Illinois Value-Added Wool Producers

Inc. The state’s 2,400 producers operate small flocks and the grade of wool

is not the best. So the cooperative is

exploring value-added products, such

as stadium blankets with the colors

and logos of Illinois colleges and universities and bio-filters for hog confinement facilities. Currently, the

price of wool in that area does not

even cover the cost of shearing. The

cooperative is designed to link sheep

producers with each other and final

alternative markets for the state’s

wool supply.

Rural Cooperatives / July/August 2002 39

Unstable farm markets continued from page 29

The Texas Cattle Feeders Association (which covers Texas, Oklahoma

and New Mexico) first floated the idea

of forming a cattle marketing co-op in

about 1986, but it died for lack of

enthusiasm. “It came up again in 1992,

and failed by a smaller margin,” Hitch

said. “Then it came up again in 1997,

but still didn’t have quite have the critical mass to go forward.” 

In 2000, Hitch—whose family

feeds about 300,000 cattle in Oklahoma and Kansas—was chairing the

Texas Cattle Feeders Association

when his board told him the time was

right to form a marketing co-op to try

to earn more for their members. The

idea was that instead of independent

feedlots each selling separately to

packers, and being worked against

each other, they would commit cattle

to a co-op that would sell to packers

on their behalf. 

Formed in April 2000, the co-op

recruited its first members in May

2000, enrolled 2.1 million cattle and

“closed the books” on membership by

October of 2000. “That is a significant number of cattle—twice the size

of the largest independent cattle feeder in the nation,” Hitch said. In

March 2001, Consolidated sold its

first cattle. 

Since then it has sold 60 percent of

the cattle submitted by its members.

Cash sales have accounted for 39 percent of sales, premium-grid sales 39

percent and in-the-beef (or carcass

weight) sales the other 22 percent. “I

wish we had more negotiated grid

sales—I think we need to get away

from the cash market,” he said. Consolidated members have netted $8 per

head more than on the cash market. 

“So yes, Consolidated Beef has

achieved some success, but it is not as

successful as it needs to be,” he said.

Hitch noted that the co-op had a small

loss of $160,000 the first year (against

cash reserves of $2 million). 

“It’s been a tough, tough time for

cattle sellers,” Hitch said. “There’s too

little packing plant capacity and too

many cattle to sell. That does not give

you much traction as a seller.”

Again, about that pot roast. Now the

industry is offering consumers a goodtasting roast that is mircowavable in

seven minutes and has potatoes and

carrots with it, Hitch said. 

“When you brand your product,

there is huge incentive to line up a consistent supply of the right kind of product to make your brand successful. And

that’s where I want Consolidated Beef

to fit in. I want the packer to make

more money,” he said, but he also

wants his members to make more money “by making Consolidated Beef the

supplier of choice for a packer/retailer/branded program that provides the

right kind of cattle at the right plant at

the right time to make the program

work. We are not there yet, but that’s

where we are headed.” ■
40 July/August 2002 / Rural Cooperatives Rural

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