Rural

COOPERATIVES COOPERATIVES

USDA / Rural Development May/June 2002 USDA / Rural Development May/June 2002

Things are 

looking up at:

Things are 

looking up at:
2 May/June 2002 / Rural Cooperatives

In a mature industry, such as agriculture, growth often occurs by purchasing assets of a competitor, or

merging two or more neighboring

cooperatives. But expansion can also

occur through internal growth of an

organization that is attendant to members’ needs and performs its services at

such a high level of proficiency that it

attracts more business volume. There

are also cases where an opportunity

exists for start-ups in areas where cooperatives historically have had low market shares, or where a new industry is

budding.

Our cover story on South Dakota’s

Valley Springs Cooperative demonstrates the tenacity of a locally owned

co-op that has maintained a strong sensitivity to the needs of its memberusers and a conservative balance sheet.

The “can do” attitude of management

and employees enables it to survive and

prosper without being caught up in the

philosophy that merger is the only way

to solve operating problems at the local

level.

In many cases, mergers can help coops achieve efficiencies by reducing

overhead and eliminating duplication

of effort. But merger is not a panacea,

and an ill-conceived merger can just

exaggerate the weaknesses of a co-op’s

component parts. As this article indicates, some locals can do just fine on

their own.

When mergers do occur, rationalization of assets based on your plan of

action is a key step in achieving overall

efficiencies. This should be done consistent with members’ service needs

and the co-op’s future business success.

The key is pursuing ownership, control

and benefits for farmers.

Growth plans require careful

analysis of the business environment,

including strengths and weaknesses of

the cooperative. This analysis should

also identify new strategies or product

lines that can increase member

income. Articles in this issue of Rural

Cooperatives examine these critical

issues in detail. 

Steps that should be taken to secure

financing for a successful value-added

cooperative are discussed in the article

on page 17. Careful feasibility analysis—from which a business plan is

ultimately developed—is especially

critical for business start-ups in industries such as ethanol, biodiesel and red

meats. This process is also essential

for existing cooperatives that plan to

extend operations into value-added

endeavors. 

Beware of potential conflicts of

interest that can arise in an addedvalue venture if your cooperative

takes on investor-owned firms as

partners. David Kolsrud, manager of

the Corn-er Stone ethanol venture in

Luverne, Minn., questions (see page

14) whether outside partners are

even needed by cooperatives in most

cases. If they are, how you structure

your bylaws may well determine if

the farmer, or the outside investor,

ultimately will control the business. 

The article on page 20—which

focuses on key questions members

should ask when their cooperatives

are facing major changes—is also relevant to this question. This article

discusses the distinct differences in

business objectives between a cooperative and an investor-owned firm. A

cooperative seeks to maximize

returns to members by adding value

to and marketing their products. An

investor-owned firm seeks to maximize returns to investors by paying

less for the farmers’ input. These differences need to be addressed headon, including identification of an exit

strategy when partnerships are

formed, or when management or other elements in the cooperative propose converting the business away

from operating on a cooperative

basis. Recent decisions to maintain

cooperative status by members of

Ocean Spray and Welch Foods/

National Grape Cooperative contrast

sharply with a recommendation of

management and the board of directors of Dakota Pasta Growers to convert to a profit-oriented, non-cooperative corporation.

Answers to USDA’s 2000 statistical

survey indicate the challenging environment confronting the farm economy and cooperative management

throughout the country (see page 8).

It is times such as these that we see

the true mettle of the cooperative

form of business and the role cooperatives play in representing member

interests. Dynamic change in farm

markets is a constant and requires an

astute management team (board and

management) to navigate the churning

waters to keep the ship afloat and to

take advantage when the door of

opportunity opens.

Randall Torgerson, Deputy Administrator

USDA Rural Business-Cooperative Service

COMMENTARY

More than one way for local co-ops to grow
Rural Cooperatives / May/June 2002 3

Rural COOPERATIVES (1088-8845) is published

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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

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Have a cooperative-related question?

Call (202) 720-6483, or

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This publication was printed with vegetable oil-based ink.

United States Department of Agriculture

Rural COOPERATIVES COOPERATIVES

May/June 2002 Volume 69 Number 3

On the Cover:

Expanding member business means that these silos at South Dakota’s Valley

Springs Farmers Cooperative will soon be bolstered by additional grain storage. This month’s cover story focuses on how this local co-op has rebounded

from near failure in the 1960s to become a strong and growing cooperative.

Photo for USDA by Greg Latza

FEATURES

4 Battening Down the Hatches:

Co-op security measures intensified in post-September 11 world

By John Dewey, Sarah Schmidt, Gail Thuner

8 Trouble ahead?

Low commodity prices, ag economy are major problems 

facing co-op management

By Charles A. Kraenzle, Thomas W. Gray

12 South Dakota turnaround

Farmers who once couldn’t give away their co-op find success

through service and slow, steady growth

By Dan Campbell

17 Getting the green light

CoBank business development officer discusses essential 

planning needed to finance an added-value cooperative

By Jeff Kistner with Catherine Merlo

20 Ask the right questions

Members should probe reasons for co-op conversions, other

major changes

By James Baarda, Randall Torgerson

23 Adapting to change

Educating members helps smooth transitions

By Jim Wadsworth

DEPARTMENTS

2 COMMENTARY

26 NEWSLINE
4 May/June 2002 / Rural Cooperatives

Battening down the hatches

Co-op security measures intensified in post-September 11 world

John Dewey, CF Industries Inc.

Sarah Schmidt, Farmland Industries Inc.

Gail Thuner, USDA Rural Business-Cooperative Service 

Editor’s Note: Dewey is corporate communications manager for

CF Industries, Schmidt is public relations manager for Farmland

Industries and Thuner is a USDA agricultural economist. 

he events of Sept. 11, 2001, have forever

changed the American mind set. No longer do

Americans feel safe from attacks by terrorists.

Feelings of shock, anguish and anger combined

with a real sense of violation have led to

increased security measures throughout the United States in

nearly every industry. 

The agricultural industry has been especially affected as

concerns about the use of crop dusters and agricultural

chemicals have risen to a new high. Two major cooperatives in the fertilizer industry, Farmland and CF Industries,

have always been aware of potential security concerns, but

both have increased their guard as security threats have

become a heightened concern in a post-Sept. 11 world.

Farmland redoubles security efforts

Assessing risk, planning “what-if” scenarios and protecting

products from illegal use have long been routine practices for

Farmland Industries. But the September 11 events, as well as

the anthrax-tainted mail incidents, have generated an added

security emphasis.

Before Sept. 11, Farmland’s “what-if” scenarios may have

dealt with a leak or accidental release of fuel or an agrichemical. Now Farmland considers the threat of anthraxtainted mail or even someone flying an airplane into a fertilizer manufacturing facility to create an explosion.

Preparation will make or break the response to such an

event. Scott Ast, Farmland director of worldwide security,

and his team look at big-picture processes and risks. They

also serve as a resource and consultant to Farmland business units and facilities. “We want to protect all the

points in the process—from securing raw materials to

production, storage and distribution,” Ast says. 

Although imagining the most elaborate “what-if” scenarios is part of the job, it is important to balance that

with the most likely security breaches. According to Ast,

the most prevalent illegal use of a Farmland product

remains the theft of anhydrous ammonia to make

methamphetamine.

Transportation is another vulnerable point in the production and distribution process. Companies such as Farmland

are taking necessary precautions against theft and misuse.

Farmland drivers are more aware of their surroundings and

are encouraged to lock their units and park in secure areas.

Farmland has also eliminated preloading of trucks. 

Farmland security officials have attended a number of meetings between farm organizations and government agencies to

discuss the chances of agriculture becoming a terrorism target.

It recommends the following suggestions for local cooperatives.

• Know your customers and escort everyone while on

your property.

T

Ralph Britt doesn’t mean to be un-neighborly, but even before Sept.

11 and the subsequent anthrax attacks he had to carefully control

access to his Mt. Olive, N.C., hog operation. Now livestock producers and others are being urged to be even more vigilant due to possible acts of agro-terrorism. USDA photo by Ken Hammond 
• Report any suspicious attempts to purchase ammonium

nitrate or urea to the FBI. 

• Pay close attention to product inventories and 

shipments. 

• Conduct a full security review of your facilities.

• Construct suitable barriers around your property, such as

fencing and structures.

• Park vehicles and equipment where they can be easily

seen by law enforcement during regular patrols. 

• Use steel doors with deadbolt locks and bar windows

where appropriate. Use high-security chains and padlocks.

• Lock vessels, containers, hoppers, tanks and equipment

containing hazardous products.

• Deter vehicle ingress by using gates or bollards and

chain/cable with padlocks.

• Remove hoses and use tank locks and seals for anhydrous

ammonia tanks.

• Ensure security and emergency plans and procedures are

in compliance with local, state and federal requirements.

Conduct quarterly drills and training exercises.

• Post “Private Property-No Trespassing” signs along

fence lines/boundaries.

• Keep an undated list of all emergency contacts.

• Maintain effective information technology security, password protection and firewalls.

• Report all suspicious activities, vehicles or persons

around your property. 

• Report all threats on personnel and facilities. 

• Report all thefts, inventory shortages or missing products that could pose a public health or safety risk. Keep

blank bills of lading and order forms secured. Keep seals

and labels secured. 

• Don’t allow loaded, unattended, unsecured trailers on

your site.

• Create opening and closing security checklists for

employees.

• Maintain close liaison with local law enforcement and

emergency responders. Ask for extra law enforcement

patrols and give them tours of your property.

• Establish a process for including neighbors and the community as part of the property security and emergency

procedures.

Awareness, vigilance and common sense are all part of

ensuring that ag products are used in the intended manner.

CF Industries stresses around-the-clock security 

At CF Industries, new security enhancements were added

to complement the company’s existing list of security systems

and activities after Sept. 11. Frank Buzzanca, vice president

of Environment, Health and Safety (EHS) and Engineering,

USDA has responded in the wake of Sept. 11 by creating a new infrastructure to move forward on numerous fronts to better protect the nation’s agricultural and

food systems. 

Speaking at the annual meeting of the National Council of Farmer Cooperatives in Orlando in January, Jeremy Stump, a confidential assistant to Agriculture Secretary Ann Veneman, said the USDA Homeland Security

Council has been created and charged with the mission

of protecting American agriculture. The panel is overseen by Secretary Veneman, with Deputy Secretary

James R. Moseley chairing the council. The council

includes all USDA under secretaries, the inspector general, selected USDA state office directors and USDA’s

communications director. The council is charged with

ensuring that information, research and resources related to homeland security is shared and that USDA activities in this area are coordinated with other appropriate

federal agencies.

“No effort will be spared by USDA as we work with

your cooperatives and all others in agriculture to ensure

the safety of the nation’s food and fiber production systems,” Stump said. 

Three subcouncils have also been created to support

the council’s mission in the following areas:

• Protection of Food Supply and Agricultural Production—responsibilities include protecting food production,

processing, storage and distribution; rapid response to

threats against the ag sector; border surveillance and

protection to prevent introduction of plant and animal

pests and diseases; food safety concerning meat, poultry

and egg inspection, laboratory support, research and

education, and outbreaks of foodborne illness. 

• Protecting USDA Facilities and Other Infrastructure—responsibilities include safeguarding USDA laboratories, technical facilities, collections and information

from biohazards and pathogens. Also ensures security

of USDA scientists, National Forest System lands and

related infrastructure and information technology

resources at USDA. 

• Protecting USDA Staff and Emergency Preparedness—this subcouncil deals with all issues affecting

USDA staff and the continuity of operations plan, continuity of government, occupant emergency planning and

federal inter-agency emergency coordination, as well as

emergency communications within USDA. ■

USDA responds to security needs

Rural Cooperatives / May/June 2002 5
6 May/June 2002 / Rural Cooperatives

“We never had to think like a terrorist before. But

now we must in order to better secure our facilities from

possible sabotage.” 

These are the words of the security director for a

major farm supply cooperative (who asked that he and

his co-op not be identified). They reveal much about

the changed world view facing cooperatives and others in the wake of the Sept. 11 terrorist attacks. 

How real is this threat of agro-terrorism? Very real,

according to Dr. Peter Chalk, a senior researcher with

the RAND corporation in Arlington, Va. Speaking at the

annual meeting of the Farm Credit

Council (FCC) in Orlando in January, Chalk said terrorists might

view the nation’s $190-billion farm

economy as an inviting target. 

Livestock operations—such as

feedlots and dairies—are especially

at risk, since a pathogen introduced

by a terrorist could spread rapidly

through animals kept in close confinement. Chalk said one

insidious aspect of agro-terrorism against livestock is that

it can be difficult to differentiate between a naturally

occurring disease outbreak and one caused by a terrorist.

Current methods for reporting livestock disease outbreaks need to be improved, and farmers and ag facility

operators everywhere need to better plan how to protect their operations from potential sabotage, he said,

adding that many livestock processing plants have only

“rudimentary security systems in place.” 

Chalk recommended that much more be invested in

human and logistical infrastructure to better protect the

nation’s food production system from agro-terrorists. Other recommendations include reforming the curriculum

being taught at veterinary colleges, greater involvement

of state and local animal health specialists with USDA

emergency response staff, better

security systems at food processing

plants and more vigorous checking

of seasonal workers, among others.

A new view

“Homeland security requires all of

us to develop a new view,” Minn-Dak

Sugar Cooperative Chairman Victor

Krabbenhoft said in his address at

the co-op’s most recent annual meeting in Fargo, N.D. Krabbenhoft said

the impact of the terrorist attacks on

America have reverberated deeply

throughout all of agriculture. 

American agriculture must remain strong, he said,

“particularly in a world where we now know our own

vulnerability to a new form of warfare—one that is

fought in the shadows, one where the battle front moves

at the whim of unseen foes. One day, that battlefront

could well be our food supply.”

Krabbenhoft warned against becoming dependent on

foreign nations for vital agricultural commodities, which

could be disrupted if a war or boycott suddenly cut off

that supply, as occurred previously with oil.

Jim Erickson, spokesman for Southern States CooperPeter Chalk (above)

and Rep. Charles

Stenholm discussed agroterrorism at the FCC

annual meeting. 

Homeland security: a defining issue for co-ops

is the company’s top security officer.

“We recognize a need for heightened

awareness following Sept. 11,” Buzzanca said. “We’ve always had a strong

commitment to safety and security.

Now our focus must be stronger.”

The following list of safety and security

precautions were in place at CF prior

to September 11:

• 24-hour site security at terminal

and plant locations.

• Fenced perimeters around 

facilities.

• Emergency shutdown systems

that can be activated at stations

located throughout the plants and

ammonia terminals.

• Dikes surrounding liquid fertilizer

storage tanks to contain the product

in the unlikely event of a rupture.

• Periodic inspections of all ammonia storage tanks.

• Periodic drills with local emergency responders so they are better prepared if a major incident

occurred.

• Periodic EHS audits.

• Annual meetings with law enforcement to get them familiar with CF

staff and facilities.

• Annual operator safety training

and refresher courses.

CF has taken new steps since Sept.

11 to enhance security at its facilities.

The following list provides a number

of important new activities: 

• Participation in a fertilizer industry

security task force to share security

measures being taken.

• Contacting local, state and federal

agencies to discuss new security

enhancements.

• Conducting security reviews and

vulnerability studies at a number of

facilities in 2002, in addition to the

EHS audits CF already conducts.

• Anticipating unannounced visits

from the U.S. Coast Guard and

other government agencies that

are checking to see if proper safety

measures are in place. In 2001, the

Coast Guard visited three CF locations and determined employees

took proper security precautions. USDA photos by Dan Campbell 
Rural Cooperatives / May/June 2002 7

ative, Richmond, Va., said his cooperative believes the threat is real and is

thus taking steps to better secure its

operations. “Before 9-11, we already

had taken a number of security steps.

In the aftermath, it basically was an

issue of reiterating and/or putting

more emphasis on what we had been

doing,” he said. “For example, we already had procedures in place for recording sales of ammonium nitrate. In

keeping with the FBI’s request after 9-11, we added

record keeping on urea sales.” 

Southern States also sent out guidelines for keeping

fertilizer supplies, chemicals, petroleum products and

rolling stock more secure—including the use of alarms

at some locations. “Post 9-11, we’ve added alarm systems at some additional locations and maintained our

emphasis on ongoing security steps.”

National security and the safety of customers and their

communities is the first concern for Agriliance, the fertilizer

joint venture of CHS, Land O’ Lakes and Farmland Industries.

In the January issue of “Cooperative Partners” magazine,

Agriliance CEO George Thornton says co-ops and farmers

should “check your buildings, fences, lighting and locks, and

provide combinations to local law enforcement officials. 

“Also, re-establish contact with local law enforcement agencies that would be called in the event of product theft or tampering,” he added. “Ask them to make

your facilities part of their routine daily safety patrols.”

Brad Gottula, Land O’ Lakes Farmland Feeds director

of quality assurance and regulatory compliance, makes

similar suggestions. “If you transport, manufacture or

store commercial feed, be vigilant for any suspicious

activity and be proactive in preventing problems before

they occur,” he says in the article. For dairies and hog farms,

limiting visitors is the first step,

followed by monitoring and testing on a regular basis. Buying

new animals from a known

source and segregating them

early on is also good advice.

Attacks remind U.S. of energy vulnerability 

Rep. Charles Stenholm of Texas, who also addressed

the Farm Credit Council annual meeting, said Americans

have long believed that they have a right to cheap energy, but that the terrorist attacks should have jogged

everyone into a sense of a new reality regarding energy. 

“We had better recognize that we need to produce

all of the energy we can, as efficiently as we can,” Stenholm said. “We cannot do that with cheap oil.” Ethanol,

wind and solar power cannot compete with oil that sells

for $10 or $15 per barrel, he said.

“But with $25 oil, you will have the entrepreneurs of

the world coming forward,” he said.

Agriculture and the oil industry should work together,

Stenholm said, adding that there is really no reason for

the oil industry to oppose the development of a U.S. grainbased ethanol industry. “We need all the energy we can

get,” Stenholm said. “I thought we learned that in Desert

Storm. We did, but it only lasted about six months. 

“I was just reading a book on Osama bin Laden, written in 1999, and it’s scary folks. I recommend it for every

one of you. Agriculture will play a bigger role in energy

production. And it is moving in that direction, but it

requires some policy give and take.” ■

—By Dan Campbell, editor

CF’s corporate Web site has taken

on a different look following Sept. 11 as

well. Anything CF felt was too revealing—from a security standpoint—was

taken off of its Internet site.

Employee training remains a vital

component of CF’s security program.

CF Industries’ media relations training

was tested during a television reporter’s

surprise visit to the company’s

Louisiana plant. The reporter was following up on a news lead regarding

reports of a suspicious vehicle in the

area. While the reporter gathered

information from the plant manager,

the television photographer stood near

a service road and prepared to set up a

camera to videotape the plant. CF

security guards promptly asked the

photographer for identification. The

reporter later noted on the newscast

that the company was doing a good job

maintaining its security. 

“A strong safety culture has existed at

CF for a long time,” said Buzzanca. “This

employee mind set is deeply rooted as a

result of years of training, drills, safety

audits and learning from experience,”

Buzzanca said. “Our employees are

trained to be alert at all times.”

CF also communicates periodically

with residents in the communities

where it operates. Information about

shelter-in-place is circulated in an

effort to educate people on the steps to

take if a major incident were to occur.

The company’s public affairs office

has monitored anti-terrorism initiatives discussed in Washington and at

state capitols. CF will work with trade

associations and regulatory agencies 

to ensure the safety of the fertilizer

industry’s infrastructure and products.

The company will continue to enhance

security as required to protect employees, company assets and surrounding

communities.

In spite of all the new measures,

though, awareness of potential threats

and continued communication with

the industry, the government, the

community, and employees remain at

the core of these cooperatives’ new

security programs. ■

“We now know our own 

vulnerability to a new form

of warfare—one that is

fought in the shadows...”
8 May/June 2002 / Rural Cooperatives

Charles A. Kraenzle, director, statistics

Thomas W. Gray, rural sociologist

USDA Rural Business-Cooperative Service

Editor’s Note: USDA/RBS Research Report 192, “Problems and

Issues Facing Farmer Cooperatives,” examines more fully the various survey responses discussed in this article. It should be available

by late June on the Internet at www.rurdev.usda.gov, or by calling (202) 720-8381 for a hard copy ($5 each).

USDA survey of more than 3,000 U.S. farmer

cooperatives reveals that low commodity prices,

the general agricultural economy, operational

difficulties and increasing costs are the major

problems facing cooperative management. Survey results indicate deep-seated concerns about the future viability of both cooperatives and agriculture in general. 

Survey respondents were asked two open-ended questions

regarding what they saw as the major problems during the past

year, and what they foresee as the major problems in the next

year or two. The same four major problem areas were identified by both questions, but with shifts in emphasis (see table 1). 

Among the four major problem areas identified during the

past year, nearly one-fifth of the responses cited low commodity prices—making it the most common response. This included low prices for cotton, cottonseed, sweet potatoes, almonds,

apples, pears, fresh fruit, milk, sugar, grains and eggs.

The general agricultural economy was the second most

cited problem area. A broad range of responses was included

in this category, such as concern about: “the depressed farm

economy,” “loss of acreage and farmers,” “number of dairy

farmers quitting business and leaving the farm,” and “producer profitability.” Other responses included: “size of farms

getting bigger, farmers bypassing local co-op for supplies and

sales,” “shrinking ag market,” and “too many big farmers.”

As a result of the changing structure of agriculture, many

said their cooperative’s sales and profitability were declining.

Cooperative operational problems, cited third most frequently, included such diverse concerns as: “need for more

working capital,” “financing,” “debt management,” “equity

management,“ “need to increase sales,” “marketing issues” and

“acquisition of another company and adding its operations to

ours.” Examples of other responses in this category included:

Trouble ahead?

Low commodity prices, ag economy are major problems facing co-op management

A

“working through merger,” “loss of feed customers,” “reducing our expenses by closing

smaller branches to meet larger farmer needs

more competitively,” “understanding and

responding to our strengths and weaknesses,” and “identifying and persuading directors to pursue nontraditional income

opportunities.”

The fourth most

often cited problem

for the past year was

increasing costs. Nearly

one-third of the respondents

mentioned the rising costs of

fuel as a concern. Others mentioned increased cost of doing business because of higher costs for labor,

insurance, supplies and other expenses.

Examples of responses included: “rising costs,

particularly for energy,” “high fuel prices causing

cash flow problems,” “rising labor costs,” “rising

overhead—insurance, health insurance,

utilities, etc.,” “increasing costs of

operations; labor, repairs, depreciation” and “construction costs.”

Problems in the near future

The same four problem areas were

identified for the near future, but

with the agricultural economy moving up to the top concern, followed

by low commodity prices, operational difficulties, and increasing costs. The character

of comments offered for near-future problems varied

little from those given for the past year. Respondents

may have been more hopeful for better prices in the

future, but were aware that structural concerns—such

as “the continuing trend toward larger farmers,” “lack

of production (in local areas),” and the increasing integration of multinational agribusinesses—were likely to

continue to be problems in the near future. 

There was less frequent concern with prices and

Illustration by Steve Thompson
Rural Cooperatives / May/June 2002 9

the weather, more frequent acknowledgment of major structural difficulties of the agricultural economy, and greater

concern about competition. However, problem areas identified as difficult during the past year—low commodity prices,

agricultural economy, operational difficulties, increasing

costs, labor, low margins, competition and weather—continued to be cited as future concerns.

Influence of co-op function 

Whether a cooperative was primarily involved in marketing, or providing farm supplies or service had an impact on

which problems were cited most often. Marketing cooperatives more frequently cited operational difficulties and competition as concerns. In the context of low prices and declining

numbers of farmers and production, marketing cooperatives

may plan to expand sales and markets, recruit new and larger

members, or—at a minimum—maintain current market share.

Intense competition from larger organizations may make

these plans difficult and raise various other operational

issues for future survival.

As did marketing cooperatives, farm supply

cooperatives frequently identified “the agricultural economy” as well as “low commodity

prices” as major problems. However, farm

supply cooperatives more frequently identified

“low margins,” rather than “operational and competitive” concerns. With farmers going out of business, low prices, and farmers not being able to pay bills,

many farm supply cooperatives may not be able to maintain

margins. Responses from supply cooperatives cited: “loss of

sales, lack of earnings in the agricultural industry and high

cost of products for resale.” 

Service cooperatives identified low prices, increasing costs

and weather as major problems. These cooperatives are likely

more affected by weather concerns than are marketing and

farm supply cooperatives. With low prices and a history of

declining volume due to poor weather, these respondents

most often worry about increasing costs. 

With marketing and supply functions, various tensions

between the environment of the cooperative and the cooperative organization become evident. With marketing cooperatives, respondents identified operational difficulties within a

larger context of the agricultural economy, competition and

low commodity prices. With farm supply cooperatives,

respondents identified low margins within a larger context of

the agricultural economy and low commodity prices. With service cooperatives, respondents identified low prices and weather as well as increasing costs as problem areas. “Increasing

costs” are particularly worrisome. 

When respondents shifted focus to the near future, larger

structural comments became more prevalent. 

Influence of co-op size

Low margins, increasing costs, low commodity prices and

size of cooperative are all closely inter-related. If a cooperative is

struggling with low margins, they can sometimes be improved

by increasing prices and/or lowering costs. In a market of pervasively low prices and thin margins, a rise in costs can be particularly problematic. Not only can the cooperative not raise prices,

but in a climate of “increasing costs,” the cooperative is not likely to be able to reduce its own costs and improve margins. 

These difficulties may be particularly ominous with smaller cooperatives, because they also have smaller volumes. In

an environment of increasing costs, smaller cooperatives may

have more difficulty maintaining margins than larger cooperatives, given that larger cooperatives can spread costs over

greater volumes. Smaller cooperatives with smaller volumes

have less room to spread costs. 

This is particularly difficult in an environment of increasing costs. Smaller cooperatives will likely find it more difficult to maintain or improve the survivability of the organization. Competitive problems only deepen these dynamics,

compounding the difficulty of maintaining margins in an

environment of low prices and increasing costs.

These relationships tended to be borne out when considering problems based on co-op size. Operational difficulties

addressed the internal problems with which cooperatives

struggled to improve margins in an environment of low

prices and increasing costs. For smaller cooperatives that find

it difficult to spread increased costs over larger volumes,

competition emerges as a more frequently cited challenge,

making it more difficult to expand volumes. For larger cooperatives with much larger volumes, labor issues were identified as more problematic for the near future, though labor

was cited by some smaller cooperatives as well. 

The agricultural economy was among the most often cited

problem areas across all sizes. As with other considerations,

when respondents shifted focus to the future, structural considerations were cited more often. Regardless of the shifts in

costs, margins, size, growth and/or consolidations, the loss of

the farming base represents fewer farmers and increased

competition for a greater number of larger-volume farms.

Big concern: survivability

The responses showed a deep concern with the survival of

farmer-members and cooperatives. Survival of farmers was seen

as a product of the various influences that went into producer

profitability. Low commodity prices were understood as pervasive, both in the past and as expected in the future. These low

prices were partly due to excess supply, driven by expansion in

the production of various commodities in some domestic

regions, as well as increased imports of low-cost foreign goods. 

Producers had to face these low commodity prices along

with the rising costs of fertilizers, energy and, in some

instances, labor. The problems of low prices and increased

costs were compounded in some regions by weather conditions that reduced local volumes. Under such conditions—low

prices, increasing costs, and declining volumes—producer

profitability drops and survivability becomes more difficult.

Some farmers discontinue operations due to inadequate
10 May/June 2002 / Rural Cooperatives

earnings. Others discontinue operations

due to retirement, urbanization and

health problems. Some farmers develop

strategies to stay in business. They may

seek greater volumes by expanding both

vertically and horizontally. Some

engage in contract production or use

other practices (Internet purchases and

sales) to improve the overall efficiency

of their farm operations. 

Many of these dynamics have direct

impact on cooperative survivability. Fewer farmers can reduce local volume, commodities sold and supplies and services

purchased. Large farms with greater volumes may have the option to bypass local

cooperatives and go direct to terminals. 

Others that do not bypass the local

may want better deals from their cooperatives. Those who contract with

investor-owned firms channel volume

away from cooperatives. 

Cooperatives must operate in an environment of increasing costs. Reduced

volumes, low prices and increased costs

have contributed to low margins. Cooperatives have sought to respond with

various operational adjustments—niche

marketing, improving financing, managing debt, improving efficiency and

expanding growth—as well as improving returns to farmer-members, thereby

helping keep them in business (and preserving volumes). 

Some cooperatives have gone out of

business. Others have sought to make

various organizational changes, including closing smaller branches, increasing

the number of locations and forming

mergers, joint ventures and strategic

alliances. These organizational changes

have been undertaken in an environment where other competitive agrifood organizations are consolidating

and integrating—both vertically and

horizontally—creating food chains with

multi-regional and global reach.

About the survey...

Information was collected by adding

two open-ended questions to RBS’

annual survey of farmer cooperatives.

1. “In the past year (ending in 2000,)

what did your management consider to

be the major problem or issue facing

your cooperative?” 2. “What does your

management see as the major problem

or issue facing your cooperative in the

next year or two?” 

Responses were received from 1,147

of the 3,058 cooperatives surveyed.

Most of the responses were short, such

as “accounts receivable,” “decline in

farmers,” “competition” and “low farm

prices.” Some cooperatives identified

more than one problem or issue, such

as “low farm income and excessive government regulations” or “imports,

retail consolidation, prices.” 

Seventeen problem areas or classifications were identified. For example,

included under “the agricultural economy” were such responses as: “changes

in agriculture structure,” “depressed

farm economy,” “declining number of

farmers,” “decrease in production,”

“losing small family farms,” “encroachment from development” and “declining net income of farmers.” 

Other problem areas cited were

accounts receivable, competition, consolidation, technology, genetically

modified crops, government regulation, government programs, increasing

costs, labor, low commodity prices,

operational problems, transportation,

weather, members and low margins.

The classification system was used

for responses received for both the past

year and the near future. A two-tier

methodology was used to report the

findings. In the first tier, those problems that accounted for at least 50 percent of the responses were reported. In

the second tier, identified problems

were reported that accounted for at

least an additional 5 percent of the

total responses in a specific category. In

some cases where response numbers

were few, problems were noted if at

least 10 responses were received. 

Problems were analyzed by cooperative function, type, size and region of

the country for both the past year and

the near future. From these analyses,

various relationships among the problem areas were revealed. ■

Table 1—Problems identified by co-op management

Problem or issue For past year1 For near future

Number Percent Number Percent

Low commodity prices 281 18.8 242 15.5

Agricultural economy 199 13.3 278 17.8

Operational 165 11.0 159 10.2

Increasing costs 135 9.0 155 9.9

Labor 124 8.3 113 7.2

Low margins 118 7.9 113 7.2

Competition 116 7.8 136 8.7

Weather 98 6.6 61 3.9

Accounts receivable 48 3.2 35 2.2

Government regulations 47 3.1 55 3.5

Other 35 2.3 34 2.2

Government programs 30 2.0 36 2.3

Members 28 1.9 32 2.0

Genetically modified crops 20 1.3 22 1.4

Technology 19 1.3 54 3.5

Transportation 17 1.1 15 1.0

Consolidation 16 1.1 25 1.6

Total2 1,496 100.0 1,565 100.0

1 A number of cooperatives reported more than one problem. The second and third problems

listed were included in the total responses. The cooperatives were not asked to give any priority or ranking to the problems reported. 

2 Totals may not add due to rounding.
Rural Cooperatives / May/June 2002 11

No. of Catalog

Copies Number Title

______ CIR 45-1 - The American System of Business

______ CIR 45-2 - Cooperative Business Principles

______ CIR 45-3 - The Structure of Cooperatives

______ CIR 45-4 - Who Runs the Co-op? Members

______ CIR 45-5 - Who Runs the Co-op? Directors

______ CIR 45-6 - Who Runs the Co-op? General 

Manager and Employees

______ CIR 45-7 - Financing Cooperatives

______ CIR 45-8 - Income Tax Treatment of Co-ops 

No. of Catalog

Copies Number Title

______ CIR 45-9 - Legal Foundations of a Cooperative

______ CIR 45-10 - Strategic Planning

______ CIR 45-11 - Co-op Business Management Functions

______ CIR 45-12 - Base Capital Financing of Cooperatives

 **** CIR 45-13 - Farmer Cooperative Statistics 

(Not available in printed form)

______ CIR 45-14 - How to Start a Cooperative

______ CIR 45-15 - Agricultural Marketing Cooperative

Name __________________________

Address __________________________

__________________________

City __________________________

State _________ Zip _____________

Understanding Cooperatives is a 15-part series of

four-page fact sheets aimed at people considering

starting cooperatives, new co-op members and

students. They are ideal as basic educational

pieces and for anyone who needs to give a talk on

cooperatives. And all are presented in an attractive, easy-to-read format. 

Recommended for use by educators, university

extension services, and people organizing co-ops.

They are free from USDA Rural Business-Cooperative Service. Download them from our Website:

www.rurdev.usda.gov/rbs/coops/csdir.htm

Or, fill out the order form below for a hard copy

and send or fax to: 

USDA/Rural Business-Cooperative Service 

STOP 3255

Washington, D.C. 20250-3255.

Telephone: 202/720-7558

FAX number: 202/690-2750

E-mail: coopinfo@usda.gov 
12 May/June 2002 / Rural Cooperatives

Dan Campbell, editor

ow low can you go? How about offering to sell

your cooperative—lock stock and barrel—to a

neighboring co-op for one lousy dollar, but

then getting turned down!

That was the situation in the early 1960s

facing Valley Springs Farmers Cooperative, a local farm

supply/grain co-op near the Minnesota-South Dakota state

line east of Sioux Falls, S.D. However, that rejection

proved to be a blessing in disguise. The co-op “went back,

re-focused” and pulled itself up by the bootstraps, says

board President David Kolsrud. “They weren’t about to

throw in the towel—they were willing to do whatever it

took to make it work. The members stayed loyal to the coop and turned it around.” 

Today it is a highly successful operation with a growing

membership and strong balance sheet. Indeed, an analyst

for a major chemical supplier that deals with hundreds of

Midwest co-ops recently told Valley Springs it has the

strongest balance sheet of any local co-op the company

works with. The co-op’s 2002 annual report shows patrons’

equity of $1.9 million and total assets of $2.5 million, a .75

ratio of equity-to-assets. It owes only $79,000 in long-term

debt (for a lease). 

“That is about as strong (a balance sheet) as you’ll see,”

confirms Randall Torgerson, deputy administrator for USDA

Rural Business-Cooperative Service. 

Valley Springs had just under $4.3 million in total sales for

2002, up from $3.9 million in 2001. Net pre-tax proceeds in

2002 were $186,000, up from $165,000 in 2001. The co-op

sold more than 653,700 bushels of grain (mostly corn and

soybeans) in 2002, up from 633,000 bushels in 2001. Other

major sale centers for Valley Springs are fertilizer, petroleum,

agronomy services and feed. 

Reversal of fortune

The picture was not so rosy when a young man named

Paul Edmundson, a farm boy from nearby Rock County,

Minn., arrived at Valley springs in the early 1970s. He started

as a laborer but quickly worked his way up to co-op manager,

a job he’s held since 1974. 

The key to the co-op’s reversal of fortune, Edmundson says,

was a combination of providing individual service to members,

a policy of slow, steady growth (rather than growth through

merger), and a conservative business approach that involved

carrying a minimal debt load. “With maybe a little good luck

thrown in,” Edmundson adds. 

Some recent co-op failures have been attributed to overly

aggressive merger philosophies, in which the buyer took on

too many liabilities of the co-ops it acquired. Valley Springs

has instead preferred to expand its member base without

merging. “Our philosophy has always been, if you take care

South Dakota turnaround

Farmers who once couldn’t give away their co-op 

find success through service and slow, steady growth 

H

“We’ve been putting our money in agronomy, because that’s where

the profits are,” says Valley Springs Manager Paul Edmundson,

seen here on a dry fertilizer, air-flow applicator rig. Photos for USDA

by Greg Latza
Rural Cooperatives / May/June 2002 13

of members, new members will come in

through the door. And that’s what has

happened,” says Kolsrud. 

“We owed $54,000 back when I took

over—which I thought seemed like an

unreal amount of money to owe back

then,” Edmundson continues. “Today, of

course, people would look at that as a

drop in the bucket. But the first thing I

did was pay off the debt. My goal was then

to get to $1 million in working capital;

we’ve passed that mark now. We may borrow a little during peak season, but usually

only for a month or so.” 

Kolsrud says Edmundson’s skills as a

manager have played a big part in the coop’s climb back up the hill. “Paul is a master at managing inventory and money,”

says Kolsrud, who knows something

about management, since he wears that

hat for the nearby Corn-er Stone Farmers

Co-op in Luverne, Minn. “And he knows

how to delegate authority. He hires an

agronomist, then lets him make the agronomy decisions

without second-guessing him.”

Yes, employees do make mistakes. “But I don’t climb down

their throat,” Edmundson says. “If they don’t ever make mistakes, they probably aren’t trying hard enough.”

Grain philosophy: move it or lose it 

The co-op is known for its ability to move corn and soybeans rapidly. It can store about 300,000 bushels in its elevator and three grain bins in the small town of Valley

Springs, S.D., population about 900.

“We often buy grain in the morning, sell it and truck it out

the same afternoon,” says Kolsrud. “We would rather make a

nickle (a bushel) than to gamble by piling it on the ground.”

With a harvest that can last until Thanksgiving, there is

always a real danger of snow or rain damaging crops stored

outside, hence the co-op’s desire to move it or lose it. “We

put wheels under it as fast as we can,” confirms Edmundson.

The cooperative, which faced another crisis in 1979

when its major facilities burned down, today needs

increased storage, Edmundson says. “We rebuilt quickly

after the fire, and we were probably too conservative. We

went smaller than we should have, or would have, had we

known how steady our growth would be.” The co-op will

likely be adding another 50,000 to 75,000 bushels to its

storage capacity in the future. 

There is no rail service to the elevator, so the truck scales

are a busy place come harvest season. At the peak, it’s not

unusual for 40 to 50 semi-trucks to roll through the co-op

elevator in a day, moving 42,000 bushels in and out.

The biggest shift in the business in recent years has been

in the amount of corn going to ethanol. The ethanol market,

which now gets about 90 percent of the co-op’s corn, has

helped offset the drop in sales to the livestock industry, which

has been in decline in the area. But now, with ethanol providing feed as a byproduct, there’s been a resurgence in livestock

feeding near the ethanol plants, Edmundson says. Most of the

co-op’s corn is sold to Corn-er Stone (see sidebar), of which

Valley Springs is a member. 

“Ethanol is definitely the new thing around here,” says

Valley Springs member Dave Willers, who farms about

2,000 acres with his brother near Beaver Creek, Minn. But

having seen the ethanol market rise and fall in the past, he is

still somewhat cautious, even though this time he thinks the

industry has real legs under it. “I hope we’re not hanging our

hat too much on ethanol. But I think ethanol is going to be

an important piece of the pie for us in the future.”

Agronomy service growing 

As livestock numbers dropped in the area, the parallel

trend has been for the co-op to devote more of its resources

to agronomy services. Despite its conservative business philosophy, Valley Springs does not skimp when it comes to

equipment. Its inventory includes state-of-the- art machinery,

including applicators with global positioning gear for precise,

cost-efficient coverage. 

“We’ve been putting our money into agronomy, because

that’s where the profits are,” says Edmundson. In the past

year alone, the cooperative has purchased an air-flow dry fertilizer spreader, a field sprayer, a fork lift, a skid loader and

two pickup trucks—all new. In the office, things are a little

less high-tech, as evidenced by the rotary-dial telephones. 

During the spring, when the fertilizer rigs are flying,

Edmundson and the other employees often work from

Board President David Kolsrud, left, says the use of quarterly financial reports has been an

invaluable tool in keeping Valley Springs headed upward. With him are co-op member John

Sjaarda and Manager Paul Edmundson.
about 4 a.m. until 9:30 at night. The

co-op has five full-time employees,

who are supplemented with five seasonal workers during peak business

periods. 

Inventory control is done the “oldfashioned, hands-on way,” says

Edmundson. “I don’t use a computer

much.” The rule for scheduling

agronomy service to members is to do

whatever it takes to meet a commitment to a member. 

Commandment No. 1:

know thy members 

By remaining small—the co-op has

about 400 members, of which perhaps

150 are very active—the co-op has

maintained a close working relationship with members.

“It still has a farmer identity—they

know us and we know them,” says

Willers.

“If there’s one thing I can’t stress

enough, it’s that our co-op has succeeded

by anticipating and meeting the needs of

our members,” says Kolsrud. “And we

never overlooked the smaller, loyal

members in order to go down the road

and sign up a mega-farm.”

As a result, the co-op membership

today represents a good cross section of

the farm community it serves. “Our

members range from weekend farmers

to producers with 3,000 acres or

more,” says Edmundson. In addition to

corn/soybean farmers, the membership

14 May/June 2002 / Rural Cooperatives

The success of a $20 million corn-to-ethanol plant

built in Luverne, Minn., has proven to be a major asset

for farmers in the southeast South Dakota area. Completed in 1998 with the help of a $5 million Business and

Industry loan guarantee from USDA’s Rural BusinessCooperative Service, the Agri-Energy LLC plant is paying

farmers a substantial return on their investment, says

David Kolsrud, manager of Corn-er

Stone Farmers Co-op, one of three owners in the LLC (along with Corn Energy

Investors and Fagen Inc.). 

The co-op had net income of $5.2 million in 2001, up from $2.2 million in 2000.

Total operating expenses last year were

only $98,000. 

The success of the ethanol operation

has not gone unnoticed. The co-op has

received a purchase offer for several

times the construction cost, Kolsrud

says. But so far the current owners have

no intention of selling.

Kolsrud says he thinks that too many

farmers are making a mistake when they let outsiders

put up the bulk of the money for ethanol or soybean processing plants. 

“I think there is a growing fallacy out there that it was

fine for farmers to be in the drivers’ seat for a time on

these new generation co-ops. But—as the projects get

bigger—people come into town and say: ‘Well, there’s no

money in farming; let’s get some outside capital and then

find a few farmers to work with to get this plant built.’ 

“I totally disagree with that view. There’s plenty of equity to be had in most farming communities for the right project with good leadership. On any given day, most of the

nation’s 300,000 significant producers can each leverage

$100,000 just on their land and machinery,” Kolsrud says.

“If you take just 100,000 of those producers, that’s $10 billion. Enough to buy out the biggest agri-business giants.” 

“Leadership is the key to getting farmers to invest in

value-added projects—they have to see someone they

know and respect leading the way,” adds David Willers, a

local cooperative member. Seed money provided by USDA

Rural Development through its new value-added grant program can be the key catalyst to reviving the economy in

many rural areas, Kolsrud and Willers say. 

“Seed money is critical in the early

stage, when you are developing the business plan that will be used to attract farmers to invest,” Willers continues. “You

need to be able to hire expert help to

develop a solid business plan that will

clearly explain the project. USDA’s valueadded grant program is exactly what rural

America needs.” 

Getting off on the right foot is critical,

Kolsrud emphasizes. “Profits that flow

back to the farmers will be determined

when you write your bylaws and articles

of incorporation. If you don’t have the right

legal and accounting work done at the beginning, your

project will never be what it could have been. That’s why

value-added grant programs are so good—they help you

lay the foundation properly.”

“If you get past that step and still have people believing in you, you can usually go out and raise the money

you need,” Willers says. 

Co-op vs. LLC structure

Some new ethanol ventures are organizing as limited

liability corporations (LLCs), rather than as co-ops. Still

other cooperatives have converted to LLCs and more

are considering it. “I’m a co-op man, so this trend concerns me,” Kolsrud says. 

An ethanol plant owned by an LLC has two major

USDA-backed ethanol plant paying off for members 

David Kolsrud – outside the Corn-er

Stone ethanol plant – says he thinks

producers should do all they can to

raise their own equity without relying too heavily on outside investors.
also includes cow-calf operators and

some dairy farmers.

The board and overall membership of Valley Springs tend to be

younger than average for a Midwest

farmers’ co-op, which Willers says

bodes well for the future. “We’ve

been fortunate to have very intelligent, committed board members,” he

notes. And they don’t do it for the

pay. Kolsrud, who has just pocketed

his annual paycheck for serving on

the board, says: “$100 for all those

meetings. But that’s OK—that’s what

makes a co-op a co-op!”

Quarterly reports “invaluable”

The co-op leaders also subscribe to

the business philosophy that if you can

measure it, you can manage it. A key

management tool which Kolsrud and

Edmundson say has helped keep the coop “operating on an even keel” is the

use of quarterly financial statements,

which are reviewed very carefully by

management and directors.

“The quarterly report has been a

great yardstick. It enables us to compare our business to each of the past

two years,” says Kolsrud. “Every

three months, we use it to sit down

and get a very close look at the financial condition of all aspects of the coop’s operations. You can look at

everything from your insurance costs

to sales trends. 

advantages over co-op-ownership, Kolsrud continues.

First, co-ops cannot take advantage of the small ethanol

producers’ tax credit. He estimates that costs Corn-er

Stone members 10 to 30 cents per bushel. 

“Every other type of business can take that credit—

LLCs, partnerships, private ownership—but not co-ops,”

Kolsrud says, blaming the situation on “a quirk of the

law” which he thinks arose from its framers not having

an accurate understanding of the tax status of co-ops. 

The second disadvantage for co-ops is that they must

report income they derive from an ethanol plant on their

Schedule F tax form, which is then

subject to Social Security taxes.

LLCs do not have to. 

On the other hand, Kolsrud notes

that co-ops are still easier to organize, they have fewer Securities

and Exchange Commission laws to

contend with, and they enjoy limited

exemption from anti-trust laws

under the Capper-Volstead Act. Indeed, co-ops don’t have

to register with the SEC, which attorney J. Gary

McDavid—speaking at the New Generation Cooperative

Leaders Conference in Washington in March—called “a

huge advantage for co-ops.” Other co-op advantages

mentioned during that discussion were that co-ops are eligible for more USDA financial programs than are LLCs, and

that an LLC has to file a state tax return for every state in

which it does business (if business exceeds a certain level), which was called “a major hassle.” 

It is the tax advantages enjoyed by LLCs for ethanol

projects that seem to be swaying many people, Kolsrud

says. A business incorporated as an LLC but having

bylaws structured so that it operates on a cooperative

basis—with true cooperative principles and which

remains under producer control—might be an acceptable business form, Kolsrud says. “But the way some are

being set up, it’s too easy for outside investors to gain

control. The odds are great that many of these LLCs will

not—in the long run—be run for the producers’ benefit.”

Seeking energy bill changes

The National Council of Farmer Cooperatives (NCFC),

National Cooperative Business Association and others

are working to get changes made in the Senate Energy

Bill that will help cooperatives on several fronts. 

“Farmer Cooperatives provide 40 percent of the

nation’s on-farm fuel supply and are the critical link in the

fuel supply chain for much of rural America,” says Randy

Jones, NCFC senior vice president. The seasonal nature

of agriculture makes getting the right supply to the right

place at the right time extremely important, he adds,

“which is why farmers—through

their cooperatives—have invested

heavily in petroleum refining and

distribution.”

NCFC has been supporting language in the Senate bill that provides incentives for renewable fuels

- mainly ethanol and biodiesel. This

includes provisions that would

expand the definition of a “small ethanol producer” from

30 million to 60 million gallons and allow farmer cooperatives to pass on to its farmer owners the current 10-centper-gallon small producer ethanol tax credit. 

A major issue facing farmer cooperative refiners

involves EPA-mandated low sulfur diesel regulations.

According to NCFC, such regulations could cost the

nation’s four farmer-owned cooperative refineries $400

million to $500 million in retro-fitting expenses. In an

effort to help offset such costs and the impact on farmers, NCFC is supporting language that would allow

farmer cooperatives (along with other small refiners) to

write off up to 75 percent of the capital cost of complying with those regulations. 

It would also provide a 5-cent-per-gallon environmental tax credit for farmer cooperatives and other

small refineries that produce low-sulfur diesel. Co-ops

would be allowed to pass that break along to their

farmer members. ■

—By Dan Campbell, editor

Rural Cooperatives / May/June 2002 15

“There’s plenty of 

equity to be had in most

farming communities for the

right project with 

good leadership.”
16 May/June 2002 / Rural Cooperatives

“Many managers do not like quarterly audits, but we’ve done it for years

and Paul and the board like the system,” Kolsrud continues. “The really

amazing thing is how consistent things

have been from year to year.”

While the board keeps close tabs

on operations with the reports, it

strives hard not to micro-manage the

operation. “We leave the day-to-day

operations up to Paul, as it should

be,” Kolsrud says. 

Annual meeting guest 

poses critical questions

When Valley Springs held its

annual meeting last year, the guest

speaker was well known to many of

the members. They remembered

CHS Chief Executive Officer John

Johnson from his days in the mid1970s as their GTA (now CHS) feed

salesman. 

“And he still remembers most of

us,” Willers recalls.

“John credited Valley Springs for

being a traditional co-op that has succeeded by being member-focused, and

for going against the tide of mergers,”

Kolsrud said. “But he questioned how

long we would be able to that in a

global marketplace.”

The question of growth is a major

topic facing the co-op. “We’re not ruling out a merger,” says Kolsrud. “But

we’re getting new members all the

time, and our volume keeps going up.” 

“Mergers have certainly diluted

loyalty in a lot of co-ops,” adds

Willers. 

“I’m not saying it won’t happen,”

adds Kolsrud. “But right now, we like

the way things are going.” ■

Figure 2—Local savings

Thousands 

1997 1998 1999 2000 2001

Year

Similar Cooperatives Valley Springs

160.00

140.00

120.00

100.00

80.00

60.00

40.00

20.00

–

(20.00)

(40.00)

Figure 1—Total sales

Millions 

5.00

4.00

3.00

2.00

1.00

–

1997 1998 1999 2000 2001

Year

Similar Cooperatives Valley Springs

Figure 1 illustrates the Valley Springs Farmers Cooperative’s strong and growing sales levels

for grain and farm supplies (compared to similar size and type co-ops). Figure 2 shows its

much higher than average income level.

While they don’t rule out a merger in the

future, none are planned, and Kolsrud, left

and Edmundson say they are pleased with

the co-op’s current growth.
Rural Cooperatives / May/June 2002 17

By Jeff Kistner

with Catherine Merlo

Editor’s Note: Kistner is a business development officer with CoBank in Denver,

Colo. This article is based on a presentation he made at USDA’s most recent Agricultural Outlook Forum. He can be

reached at (800) 346-5717, extension

2025 or at jkistner@cobank.com. If you

have questions regarding feasibility studies

or business plans, contact Kirk Martin at

(303) 740-4060. Merlo is a writer and

public affairs specialist based in Bakersfield, Calif., who is a frequent contributor

to this publication. 

s your agricultural organization considering a

start-up venture that can

add value to the company’s business operations?

You’re not alone if you are. Over

the past 10 years, hundreds of agricultural businesses across the United

States have ventured into added-value

operations, from food-producing

enterprises to operations that produce

renewable fuels derived from soybeans

and corn. Some have been successful,

some have not. 

As a major provider of financial

solutions to rural America, CoBank

has looked at many added-value ventures in the last decade. We’ve been

involved in financing ethanol and

diesel, pasta, corn-milling, turkeyand beef-processing plants. We know

what steps must be taken to ensure

that these added-value ventures succeed. Using ethanol as an example,

here is a road map to launching an

added-value venture.

The first steps

The first step in determining whether the project has merit involves

the added-value equation,

or balancing the elements

of the proposed venture.

To calculate the equation,

a lender lines up the project’s strengths, weaknesses and uncertainties

in a column format. In

order for the project to

proceed, its strengths

minus its weaknesses

must be greater than its

uncertainties. If that equation holds

true, the project can proceed to the

next step—attracting financing. 

Lenders look at five credit factors:

• Capacity—the repayment capability.

• Capital—the financial condition

or the balance sheet of the business.

• Character—the management.

• Collateral—the quality and value

of the secondary repayment

source. The collateral in most

added-value propositions may only

be used for the designated purpose

and, therefore, is considered a special-use asset.

• Conditions—the purpose, amount

and requirements to operate the

business. Lenders look at this

credit factor from two perspectives: the external and the internal. External conditions cover

such areas as the economy,

whether there is enough production in the area to support the

venture, demand for the output,

and government regulations.

Internal conditions include the

loan covenants and the business’s

ability to meet a minimum set of

financial standards.

Once these credit factors are known,

you can move to the start-up stage for

your added-value project. You must

follow each stage in order. If you jump

ahead, you’ll have problems and you’ll

end up backtracking.

You should start with an initial

meeting, which is the official formation

of the venture. Several questions must

be answered at this meeting:

• Is there a group of producers willing to invest in, or to be part of,

this business?

• If so, have you formed your organization? Will it be structured as a

not-for-profit organization, a coop, a C or S corporation, a limited

liability corporation (LLC), or

maybe the new Wyoming Co-op?

• Have you secured seed money?

This means more than just applying for a state or federal grant or

I

Getting the green light

CoBank business development officer discusses essential 

planning needed to finance an added-value cooperative 

Illustration by Steve Thompson
18 May/June 2002 / Rural Cooperatives

finding an economic development

person to do some work for you. It

means the owners must make an

initial cash investment that the

venture can apply towards

research and development.

Moving on to a feasibility 

study and a business plan

Once the seed money is secure, you

must conduct a feasibility study. This

outlines the global picture, which doesn’t

necessarily refer to an international scenario. It may be local, regional or

national, depending on your targeted

market and the proximity of your competition. The feasibility study addresses

such issues as how your organization will

fit into the global picture and what you

must do to be competitive. There are

five components of a feasibility study:

• Technology

• Management 

• Markets 

• Economic conditions

• Your financial projections

These five components are basically

what USDA requires for an analysis for

its Business and Industry Loan Guarantee Program. 

The feasibility study addresses supply

and demand characteristics. It discusses

the importance of a steady supply of raw

materials and reviews market share,

pricing trends and sensitivities. It outlines your cost competitiveness and

determines if you will be a high-cost or

a low-cost producer. It answers such

questions as: Can you get into the market? Can you enter into contracts? Are

your financial projections realistic? It

also outlines scenarios for worst-case,

best-case and what-if situations. Finally,

it details your capitalization structure.

The feasibility study is one of the

most important steps you can take on

your way to becoming a successful

added-value venture. Yet, some organizations that are willing to spend $15

million on a new plant skip this step

because they are reluctant to spend the

$20,000 to $40,000 required for a feasibility study. Still others rely on people

who will gain from their involvement

in the added-value venture to conduct

their feasibility studies. Instead, use

unbiased, third party assistance; an

impartial feasibility study should be

your goal.

Once the feasibility study is done

and you’ve outlined the global picture,

you will know against whom you’re

competing. For example, if you’re

building a plant in Missouri, you may

be competing with southern Minnesota, western Iowa or South Dakota.

How will your operation fit into that

region?

To answer that question, you must

move to the next step—the business

plan.

On to the business plan

The business plan offers a different

point of view from the global perspective of the feasibility study. It extrapolates the information to the local level.

The business plan provides details

about the operation, the market, management and the organization’s financials. It also addresses how to create a

profitable income stream for investors. 

The business plan covers:

• Markets. This will tell you who

you’ll be selling to, how much of

the market share you want, and

the quantity of product you can

expect to sell. That “who” is a critical element. It covers your customers and competitors.

• Management. This details the

players, and consists of profiles on

the board members as well as the

general manager, who will run the

daily operations.

• Money. This covers capital and

cash flow.

Included in the business plan is the

marketing element. That marketing

plan should outline how you’ll create

wealth for the investors and owners. It

should provide details on your customer

base and on the competition. It should

include specific tactics for executing the

marketing strategy. It should also consider whether there is a distribution

channel in place. You need to know if

there are existing railroads you can use

to move the ethanol or if you will need

to transport it by truck or barge.

A business plan also answers such

questions as: Are there alliances or marketing firms you can partner with? Are

there marketing contracts you can enter

into? A business plan also should provide for market contingencies or backups. Backup plans should cover not

only markets but also the operations.

One contingency that should always be

covered is when to end your investment. For example, if you’ve been losing money for three years, you need to

know if it’s time to pull the plug.

Delving into the operating plan

One management element of the

business plan is the operating plan. For

this, you’ll need to look at who’s going

to build the facilities and select the

engineers and technology experts.

Today’s ethanol industry is a mature

one, which means there are proven

engineers and builders who have successfully built and run ethanol plants.

Selecting management is an impor-

• Hold initial meeting

• Form organization 

• Secure seed money

• Conduct feasibility study:

– Economic

– Market

– Technical

– Financial

– Management

• Develop business plan:

– Operation plan

– Marketing plan

– Management plan

– Financial plan

• Develop prospectus

• Hold membership drive

• Hold annual meeting

• Finance project

• Hire manager

• Construct project

• Begin operation ■

Start-up stages

for added-value

ventures
tant component of the operating plan.

Management is a key to the feasibility

of an ethanol or biomass venture.

Therefore, you need to know which

individuals have the expertise you need.

This is a particularly big issue in

ethanol when you consider all the

ethanol plants being discussed in the

Corn Belt.

Before you begin your management

selection, you must answer some basic

questions. Are you going to do a

broad-based search for a manager? At

what stage will you employ a manager?

Hiring the management during the

early stages of start-up could be beneficial to help implement the plans and

membership drives—if you have the

right seed money to support him or

her. You must first determine the compensation package. And that package

must compare favorably with what

your competition is offering. You also

need to decide if you’re willing to

reward your management based upon

long-term results.

Focusing on financials

After you’ve selected your manager,

start looking at the financial or money

elements. The financials in the business plan basically focus on three key

items: return on investment, equity

strategy and debt strategy. We also add

a fourth element: guarantees. In most

added-value ventures, looking at a

USDA Business and Industry Loan

guarantee is an important element for

future success as it minimizes some of

the future risk in case something

should happen with your business. 

What is the risk of return, and what’s

the right return on investment? The

right return is specific to your organization and depends on your venture’s

goals. A common expected rate of return

is 15 percent. That figure is derived by

assuming the investor will take money

out of his existing business, or farmer

operation, to invest in an added-value

project, such as ethanol. If he invests that

money in the stock market, he can

expect an average 10 percent return. On

the other hand, if that investor wanted to

get into ethanol, he could also invest the

money in an investor-owned energy

stock. Therefore, if he’s going to invest

in your business, his return should be

greater than the stock market’s average

10 percent return.

On the other hand, if you would like

to bring in venture capital for your

added-value project, those investors

will look for a 20 to 25 percent return.

Yes, venture capital is coming back to

agriculture as a result of the beating it’s

taken in the technology sector in

recent years.

Or, your venture may just need to

have a return high enough to cover the

additional expense that you’re going to

incur to stay operational. 

Risk and return

When you’re determining the right

rate of return on investment for your

operation, you must make sure you

don’t include the return from the sale

of your raw material. If you’re going to

deliver corn to the ethanol plant, that

corn has a market price. An increase in

the market price will have a negative

effect on your business. It’s fine to take

your stock appreciation and your dividend and add that back to just the corn

bushels delivered—there’s your premium. But if you build your premium

upfront, the chance of your business

showing a profit or paying a dividend is

unlikely.

There have been many instances in

which an ethanol plant has increased

the basis of corn in an area by 10 cents

or more. Obviously, this is beneficial to

the farmers who did not invest in the

added-value project, because they’re

receiving a higher corn price with no

additional investment. However, while

the producer members of the co-op are

also getting a higher price for their

corn, their return on investment from

the ethanol plant is lower than expected. Therefore, you don’t want to raise

the market for the price of your commodity. What you want to do is

increase the return on your investment.

Finally, if you’re considering this

added-value venture because it provides the ability to stay on the farm,

you’ll need to look at the project differently. Basically, you’re going to break

even or even lose some money.

How much capital?

Moving forward in the money segment of your business plan, there are

other items to consider when financing

or planning a value-added project.

Lenders look at financing the entire

business and not just different components of the business. The entire business has three primary components to

consider: the total cost of plant, property and equipment; start-up expenses

from the planning stage through full

capacity; and beginning working capital.

Groups often wonder how much

capital they need to raise. Unless your

• Strategic vision and a sound business plan—Where you’re going, how

you’re going to get there and how it compares with past performance. 

• Financial size.

• Consistent financial performance. This provides any organization with

flexibility and alternatives. It positions an organization as an attractive business partner. All of which are key to increasing your financial capacity. 

• Appropriate management skill set.

• Capable board and management that understand governance implications, exit strategies of debt/equity tools.

• Established regional or national brands help. ■

What a co-op needs to be 

a player in capital markets:

Rural Cooperatives / May/June 2002 19

continued on page 34
By James Baarda, Agricultural

Economist 

Randall Torgerson, Deputy

Administrator

USDA Rural Business-Cooperative

Service 

ember involvement is a

hallmark of cooperatives. Members create,

finance and patronize

the cooperative. They

decide major changes in the cooperative, such as a merger or its dissolution.

But the most common means by which

members control the business occurs

when they elect directors, who are usually members themselves. 

Recent events in the formation of

cooperatives with non-traditional

characteristics—and the subsequent

change or failure of those organizations—have reminded us all that

another one of a member’s most fundamental duties in a cooperative is to

ask the right questions.

Two situations require members to

pay particularly close attention. Members have a vested interest in the

arrangement when a cooperative considers an association with another organization or business that may have significant impacts on the character of the

cooperative. This may occur when the

cooperative is being formed, or may

occur later. An example is when a cooperative hires advisors and promoters to

finance and establish a turn-key plant. 

Members also have a direct interest

in cooperative decisions when the

board is considering actions to convert

the cooperative to another kind of

business or organizational structure.

This situation may occur when a cooperative proposes to convert to a noncooperative corporation or one or

more limited liability companies

(LLCs). In both instances, member

inquiries and requests for information

are legitimate, necessary and healthy

for the cooperative —if done in the

right way for the right reasons.

We have seen instances recently in

which new-generation cooperatives

(NGC) decide to convert to a noncooperative corporation. NGC members should ask a series of questions

about why the cooperative failed to

meet its objectives as a cooperative and

why the conversion is a solution to the

problem. Members will want to know

exactly what led to conversion considerations. Was the cooperative consistently operating at a loss? Was the

cooperative unable to make further

investments because of a lack of capital

sources from its members? Is additional

capital required to increase the members’ benefit as producers of product

used by the cooperative?

Members and good analysis

Members need to look carefully at

the source of the problem. It is critical

that members determine if the form of

the cooperative organization itself had

an inherent weakness. Or was poor

performance or limited potential the

result of inadequate business planning

or poor management? 

Members should look objectively at

themselves, too. Did member behavior

undermine the cooperative? Refusal to

deliver, or promises to deliver that

couldn’t be met, may have made efficient cooperative operation impossible.

Members may have shown signs of

their own unrealistic expectations and

lack of commitment to cooperation.

Members may also have established

in the new business a philosophy not

compatible with a cooperative. If members expected to make money on their

investment in the organization rather

than through product delivery and

patronage returns, the stage is set for

cooperative failure. Perhaps market

projections were overly optimistic, or

maybe the market is simply not there

any more, in which case no profitable

enterprise could flourish. In any case,

members should understand the issues.

Objective assessment begins with the

right questions.

Once members understand what

happened and why, they can look forward. The critical question for the

future: What can be done to preserve

the cooperative? Just contemplating

conversion to a non-cooperative corporation or LLC shows that someone

believes that a cooperative cannot survive and provide the services and

income expected of the cooperative.

This is a very serious position to take

and members should question that conclusion vigorously. The cooperative

may have been poorly conceived and

corrections in structure or operations

may be the solution, not abandonment

of the cooperative. 

Was the organization created with

true cooperative principles? Were

cooperative principles ignored or

stretched to the breaking point? Was

the organization formed for the sole

benefit of farmer-users and was the

benefit to accrue to farmers on a cooperative basis? Members will need to

20 May/June 2002 / Rural Cooperatives

Ask the right questions

Members should probe reasons for co-op conversions, other major changes 

M
assess who will benefit from conversion

to a non-cooperative business and what

is driving the conversion idea. In a retrospective analysis, members may find

that the problem was simple, but also

fundamental. Then the task is to correct the problem.

The final set of questions that members should ask is to explore the impact

of conversion from a cooperative to

non-cooperative organization. From a

purely business perspective, if the

cooperative wouldn’t work, why would

a non-cooperative corporation or an

LLC fare any better? Members will

have a difficult time finding built-in

deficiencies in a cooperative that can be

overcome by converting to a noncooperative corporation or LLC. If

such disadvantages do exist, comparisons between a cooperative and a noncooperative corporation or LLC may

show that conversion is still not justified. Detriments to farmers and the

community from loss of the cooperative may still far outweigh any advantages perceived for conversion.

Members should also consider that

if the cooperative disappears, they may

only then appreciate its true value. But

at that point, creation of a new cooperative will force them to endure added

costs and face other obstacles. They

should be cautious of management that

constantly presses the cooperative to

engage in outside business unrelated to

the core member business. Growth for

the sake of growth, rather than to

increase the cooperative’s ability to

serve farmers, is also a cautionary signpost. A subtle, but unwarranted,

change in the cooperative’s character

may occur in a progressive manner. 

Cooperative principles count

Cooperative members and their

boards of directors have the mechanism to preserve the cooperative. The

best—in fact, the only—questions to

guide members in conversion issues are

those that get to the core co-op principles that guarantee that benefits of the

enterprise belong to the farmers and

that control rests in farmers’ hands.

When members abandon a cooperative

for a non-cooperative organization,

what do they lose?

Members measure losses by reference to cooperative principles. The

user-owner principle states that those

who own and finance the cooperative

are those who use it. A non-cooperative corporation can, of course, be

owned by farmers, but conversion to a

non-cooperative will most certainly

require former members to share the

ownership, control and benefits with

non-members. Indeed, the arguments

for conversion may be primarily based

on accessibility to outside capital. That

capital has a cost to members, and they

need to appreciate what that cost is.

The user-control principle states

that those who control the cooperative

are those who use it. Farmer-member

control is lost, or is at least fundamentally changed, when a co-op converts to

another form of business. Investors—

not the users—control a non-cooperative business, and typically the more the

investment the greater the power of

control. Farmers may, of course, maintain their investment in the new organization. But farmers will be nothing

more than shareholders in a business

the control of which is (technically)

shared by many, but—in reality—often

winds up in the hands of a few.

The user-benefits principle establishes that the cooperative’s sole purpose is to provide and distribute benefits to its users on the basis of their use.

That ends with conversion. Members

are well advised to seriously consider

the implications of such a change. The

original purpose of the cooperative was

to garner income by participation in

downstream processing and marketing. 

The implications of conversion for

Rural Cooperatives / May/June 2002 21

Because they direct profits back to members as patronage, rather than to investors living in distant locations, cooperatives help add to the 

economic vitality of rural communities. USDA Photo by Ken Hammond 
members are actually two-fold. After conversion, benefits—in the form of corporate profits—will clearly go to investors,

not to farmers as cooperative patrons.

Only if the farmers have invested in the

corporation will they receive a portion of

the profits, and then only to the extent of

their share of the investment.

Members should carefully consider

another significant change in the

objectives of the organization. A corporation is generally obligated to maximize shareholder value, and this

depends on the profitability of the

business. A business that purchases

from farmers and markets a product

will maximize its profit by, among other things, paying the least amount for

the product that will provide the supply

needed. Thus, the corporation’s motivation will not only be to distribute

maximum profits to shareholders, but

to minimize outlays to farmers.

Farmer-members are part of a community and support their community

however they can. Indeed, a goal of

many new-generation cooperatives is to

benefit the community with added business and employment. Because a cooperative returns its benefits to farmermembers, all the income is returned to

the community at a “working” level and

is recycled in the community. 

When a cooperative is converted to a

non-cooperative, the profits are distributed to shareholders who may or may

not be part of the community. Indeed,

shareholder interests may be linked primarily to distant money centers. Even if

the shareholders are from the community, the return received on their investment may not be put to work in the community as it would if received by farmers.

Other changes require

similar questions

A cooperative may make every effort

to maintain its character and achieve

some of the benefits perceived for noncooperatives by establishing ancillary,

non-cooperative, organizations. Entities may be established to handle nonmember business, involve non-producer investors, expand operations beyond

those related to member business, or

for a number of other reasons. There is

nothing inherently objectionable about

cooperatives making such business

arrangements for the benefit of the

cooperative and its members. The

cooperative will run into trouble, however, when the arrangements are used

to circumvent the cooperative’s principles or to benefit someone other than

the farmer-members. 

Business dealings may also become

so complex and intrusive in the cooperative’s affairs that members and management lose sight of the cooperative’s

prime objectives. Members should pose

many of the questions mentioned

above to be sure the ultimate result is

beneficial to members as producers. 

Are the costs worth it?

Another practice among some new

cooperatives should prompt members to

ask hard questions. NGCs are formed to

add value to the farmer’s product and

capture the benefits of that value. In most

cases, the NGC will need processing

facilities and will operate the processing

and marketing system. At the same time,

that activity may well be beyond both the

expertise and initial financial capabilities

of the farmers as a group.

If so, it is necessary to look outside

of the confines of a traditional local

cooperative. The danger is that the

expertise and up-front capital is purchased at an unacceptable cost to the

cooperative. 

The issue is far deeper than monetary outlay. Members should ask what

the arrangement will do to the cooperative, and on what principles the cooperative will operate. 

The clearest example of such a problem is where providers of a turn-key

plant act essentially as promoters of an

NGC and retain interests in its operations beyond a simple construction and

sale of the plant. A company, or group

of companies, may, for example, agree

to build the plant on the condition that

they retain a management role and

share in the earnings, thus taking a share

both of the benefits and the control that

should be reserved for members. Clearly,

members’ questions are not limited to

short-term return on investment.

Rather, members should explore longterm implications and carefully address

all the issues presented by the cooperative principles mentioned earlier.

Time and place for

members’ questions

This article has presented the type of

detailed, important questions members

should ask. But members must also recognize that there is a time and place for

their questions. Unbridled and inappropriate inquiries can be detrimental to a

cooperative and undermine the established (and legally mandated) role of

the directors and management. Members should be guided by the familiar

mantra of: “When? Why? Where?

What? How? and Who?” 

When members ask questions

depends on circumstances, but in general the earlier the better. This is

especially important when cooperatives are being formed and making the

initial decisions about control, investment, financing and distribution of

benefits. The time for questions may

be mandated, such as when a major

change in the cooperative requires

direct member approval. 

Members should be sensitive about

why they are asking the questions. If

they ask for personal benefit rather

than for the benefit of the cooperative

as a whole, or if they are asking not to

gain legitimate information but to

advocate a personal position, they are

not benefitting the interests of the

cooperative and fellow members. 

We have discussed as some length

what members should ask, which will

depend on the circumstances. Members

should realize that some information in

a cooperative may be confidential. 

The propriety of members’ questions will also depend on how questions are asked. If they are confrontational, publicized, or accusatorial, they

will not achieve their only legitimate

purpose: to obtain useful information

to respond to cooperative challenges.

Who should members ask? A cooperative’s board of directors is assigned,

22 May/June 2002 / Rural Cooperatives

continued on page 33
Rural Cooperatives / May/June 2002 23

Jim Wadsworth, program leader

Education and Member Relations

USDA Rural Business-Cooperative Service 

“...the economic and social environment in which cooperatives

operate is changing. As co-ops transform themselves to try and

adapt to this new environment, the need for cooperative education

becomes more and more critical. Co-op members need to understand

the forces leading to the changes in their economic environment,

while managers and boards need to think about the appropriate

strategies their enterprise requires to survive and prosper in this

new environment. And people in cooperatives need to be even more

aware of how their organization fits into the world around them.”

From: “A Systems Approach to the Challenges Facing Cooperative

Education and Cooperatives” 

By Murray Fulton, Center for the Study of Cooperatives, University of Saskatchewan

his passage by Murray Fulton describes the

critical necessity of educating members about

the position of their cooperative in a rapidly

changing business environment. This is

especially important for cooperatives

undergoing structural transformations. Fulton’s

words also address the need to ensure that

members understand the economic forces

impacting their cooperative, and how

well they are positioned to respond to

change. It advises managers and directors to

be proactive in creating strategies for their

cooperative’s survival and prosperity.

Indeed, members must have a solid understanding

of their cooperative’s position in the marketplace and

potential operational or structural changes that

might be necessary to further extend or protect

that position. Not only must directors and management understand the cooperative’s current

position, but they must be involved in developing strategic actions to protect and enhance

that position. They then must communicate the rationale for these actions to members. 

Some questions arise: How much do members currently

understand about their co-op’s position? What information and

how much information should be provided? How should it be

delivered?

For cooperatives to remain strong, members must take

their ownership responsibilities seriously. They must listen

and ask tough questions of their leaders, offer their own

ideas, be loyal to and financially invest in their cooperative. 

Taking ownership includes having access to knowledge of

how the cooperative is performing in its environment and its

future direction. Ownership extends to knowing the circumstances that will determine a cooperative’s future in a fastchanging and dynamic agricultural environment. Wellinformed, active and engaged members are more apt to accept

new initiatives. 

Of course, not all planned strategic actions can be immediately communicated. In some cases, providing details of

goals and strategy too early to the entire membership may be

detrimental to a cooperative’s well-being. Due to competition

and other outside pressure, cooperative leaders may need to

be discreet about what to say in the early development

stages. Significant advance work on a strategic action

must be completed before information can be shared

with the membership to indicate the cooperative’s

plans and how they will be achieved.

With that understood, it is still important

that members not be blindsided by a significant strategic action taken by the board

and management. At appropriate times,

members should be informed of their

cooperative’s current position and

planned future direction. 

Detailed information on strategic efforts

becomes especially important when cooperatives

are making a structural change that the membership

must eventually approve. For lesser plans, strong

communication is still necessary because member

distrust of the cooperative can arise if they learn of

significant changes from outside sources. 

If members are not appropriately informed in

a timely manner, a backlash may develop and the

board may find insufficient support among members for a needed structural change, such as closing a location or adding a new plant. Potential mergers, joint ventures

Adapting to change

Educating members helps smooth transitions

T

Illustration by Steve Thompson
24 May/June 2002 / Rural Cooperatives

and other major changes may fail even

after considerable work by management and the board. While there may

be many reasons such efforts fail, the

major reason is often a lack of understanding by members of why the

action was needed. 

Industry position

Members need to understand where

their cooperative is positioned in its

industry before they can support goals

and strategic efforts to improve that

position. Cooperative leaders must

adequately explain the need for

changes to operations and/or structure. 

Figure 1 shows a life cycle for a

cooperative business. The phases suggest that cooperatives develop strategies based on where they are in their

business life cycle. Where they fall on

the “S-shaped” curve depends on the

present conditions in the marketplace

and in their operations.

For instance, most traditional agricultural markets are considered mature

markets. These mature markets are

characterized by: slow to stagnant

growth, strong competition for market

share, declining farm numbers, growing size of surviving farms, service to

repeat customers, greater emphasis on

controlling costs and providing extra

services, periodic excess capacity, lower

margins and profits, diverse customer

(member) interests, etc. Many agricultural entities, including cooperatives,

find that they are in this maturity phase

of the business life cycle, requiring that

they make strategic efforts to protect,

defend and develop new opportunities.

Other cooperatives may be in

emerging agricultural markets. For

instance, new value-added (and new

generation) cooperatives are apt to be

in the introduction and early growth

stages of their business life cycle. Consequently, these organizations should

be working on strategic efforts

designed to penetrate and grow. 

Figure 1 also implies that cooperatives operating in mature markets often

employ efforts to extend their existence

along the maturity phase of their

industry life cycle. This suggests that

those cooperatives have been fairly

conservative in their approach to internal and/or structural change over the

years and implies that it is even more

important for them to educate members as to where their organizations fit

in their industry and where they may

need to make significant strategic

efforts to survive. This task is often difficult because members have become

comfortable with the status quo. 

Educating members on where their

cooperatives fit in their environment

and its business-life cycle leads to a

more informed assessment of why the

board has developed various goals and

why it may be considering or pursuing

a given change or strategy. 

Figure 1 may help directors and

managers simplify the explanation of

their cooperative’s industry position

and associated strategic direction to

members. Detailed aspects of operations, structure and the marketing

environment must be explained so

members understand the cooperative

is indeed where they say it is on its

industry life-cycle curve.

The figure may oversimplify the

complexity of the cooperative’s position

(because there are often many factors

involved), but it still provides a reference point for directors to work from.

Member understanding of their cooperative’s industry position can help

clarify and build support for the goals

and strategic efforts planned for by the

board. Failure to make changes to

improve a cooperative’s position may

eventually push it into the decline (and

potential divest) portion of the life

cycle—not a positive outcome! 

Strategic directions

Figure 2 is a model showing that

environmental factors, such as industry

trends and conditions and organizational conditions, impact a co-op’s ability to achieve goals. Cooperatives need

to assess goal accomplishment and

develop a strategic direction to

improve their position. Indeed, industry conditions dictate that organizations look to plan, adjust and position

themselves using alternative strategic

directions for continued and improved

goal accomplishment. Certain strategic

directions will be more effective than

others. They will also vary in the way

they are constructed and implemented

by different cooperatives given respective circumstances.

Figure 2 shows the major strategic

direction of adjusting and making

internal changes to operations and,

perhaps, making internal structural

changes (expansion or contraction of

assets) in order to improve revenue

streams, efficiency, scale economies,

control of expenses, and organizational

structure using leadership, niche and

efficiency-related strategies. These

changes fall under the efforts to extend

life-cycle phase in figure 1. 

Figure 1—Cooperative business life-cycle
Rural Cooperatives / May/June 2002 25

This direction is not new to cooperative leaders. Cooperatives have

traditionally and consistently looked

to grow by improving operations for

greater member benefit and efficiency. This direction has been

employed in various ways by many

cooperatives for extending their life

cycle in mature market environments.

However, simply improving operations on a recurring basis is not always

enough. Industry conditions and the

cooperative’s performance toward

achieving goals often push cooperatives

to make more significant external

changes as an extension of their original structures. In fact, some cooperative leaders have been saying that looking to external structural strategies

—acquisitions, mergers, joint ventures,

alliances, etc.—is critical if cooperatives are to stay competitive in a consolidating agriculture industry.

Figure 2 shows two external structural change strategies that extend

beyond the normally employed strategic direction of internal adjustment

and improvement. Cooperatives have

two basic directions to consider: (1)

build working relationships —develop

joint ventures, strategic alliances, or

other business relationships with other

cooperatives or companies (to help put

the cooperative into the growth and

new opportunities phase of figure 1),

and (2) unification—mergers, consolidation or acquisition (which can also

put a cooperative in the growth and

new opportunities phase). 

Joint ventures, agreements, alliances

and working relationships are common

among farmer cooperatives. They are

strategies for gaining or restoring

growth while limiting the investment

given the cooperation of the enterprises involved. Though not as severe of an

organizational change as unification,

these strategies warrant careful study

by cooperative leaders.

Unification (i.e., merger, consolidation, acquisition) is a strategy that

many cooperatives look to for accomplishing growth goals and improving

competitive position, and in some cases

for survival. Because unification drastically changes the organization—altering cooperative culture, internal and

external structure, governance, asset

base, services and membership boundaries—cooperative leaders have to be

diligent in studying and making decisions of this significance.

Structural change strategies must be

contemplated by cooperative leaders

interested in protecting competitive

position or improving cooperative value by seeking greater market share,

vertical or horizontal integration,

diversification of services and other

growth opportunities. 

Figure 2 provides a strategic planning overview for cooperatives. It

shows relationships between goals,

environment and potential strategic

directions. Cooperatives work to close

the gap between their mission and

vision by execution of strategy. Execution involves not only work by board

and management to develop appropriate strategic effort, but communication

aspects as well.

Communication issues

It is extremely important to communicate to members about their

cooperative’s current position in its

industry and how its position is affected by the cooperative’s mission, vision,

values, goals, and propensity to continue benefitting members. Additional

communication is needed on strategic

effort—the likely changes the cooperative is planning or contemplating to

improve its position. 

For internal changes, members need

to be told what is being planned and how

it will affect them and the cooperative.

Directors and managers need to explain

whether the change will expand or scale

back services in a certain area to help the

cooperative achieve better financial performance or industry position. 

For a unification, members need to

understand precisely why the change is

being considered. Inaccurate information can create controversy and negative perceptions. Members must be

made aware of why the unification is

important and how it will affect the

cooperative. This may lead to further

actions, such as vertical or horizontal

integration, the advance of scale

economies, expanded capacity and

potential synergies and efficiencies, etc.

These must all be clearly described. 

The same holds true for potential

joint ventures, strategic alliances,

working relationships and marketing

agreements. Members need to receive

accurate information and be told precisely what the strategic action will

mean to them and their cooperative.

Members must understand why it is

in the best interest of the cooperative

(the goals the change will accomplish).

They need enough information to

objectively assess the change. Feedback

and comments from members should

be welcomed. Communication must be

two-way: the board and management

need to listen as much as they talk. 

Visual aids—such as figures 1 and

Figure 2—Strategic positioning/planning model

continued on page 33

COOPERATIVE GOALS

Core goals:

Member oriented

Benefit members

Equitable treatment

Quality service

Quality products

Performance goals:

Competitive prices

Growth

Financial stability

Profitability

Viability

Equity

ENVIRONMENTAL FACTORS

Industry Trends

and Conditions

Organizational

Conditions

ASSESSMENT:

Are goals being achieved?

Will they continue to be achieved?

What strategic direction is needed?

Strategic Direction

LEADERSHIP, NICHE, AND 

EFFICIENCY STRATEGIES;

EXPANSION OR CONTRACTION

STRATEGIES

Adjust Internal

Structures, Assets, etc.

EXTERNAL STRUCTURAL

CHANGE STRATEGIES

1. Working Relationships:

Joint Venture 

Strategic Alliance etc.

2. Unification:

Merger

Consolidation

Acquisition
Foremost sales top $1.3 billion;

income steady at $10 million 

Foremost Farms, Baraboo, Wis.,

saw sales rise from $1.1 billion in 2000

to $1.3 billion in 2001, although net

income of $10.1 million remained virtually unchanged. “Commodity markets remained volatile, with strong

prices for the first three quarters followed by steep drops during the final

quarter of 2001,” said Duaine

Kamenick, finance vice president.

Average milk price climbed $3.35 per

hundredweight (cwt) from $11.62 in

2000 to $14.97 in 2001. 

President Dave Fuhrmann said the

cooperative will distribute $10.1 million

in patronage to members, or an average

of 21 cents per cwt, with 25 percent of

it in cash and the balance added to

member equity accounts. The cooperative’s ownership ratio (total equities

divided by total assets) interest was 46

cents to $1, compared with 49 cents to

$1 for 2000. The co-op’s primary products are cheese, liquid and condensed

milk products, and packaged milk products. Reinvestment for capital improvements to facilities, machinery, equipment and technology topped $44

million, up from $32 million in 2000.

“There isn’t another company in the

Midwest, private or cooperative, that

has made the investments we have for

the long haul,” said Fuhrmann.

2001 revenue & income 

climb for Minn-Dak 

Total net revenue for Minn-Dak

Farmers Cooperative, Wahpeton,

N.D., reached $177.9 million for fiscal

2001, up from $170.1 million in 2000.

Sugar sales accounted for $167 million

26 May/June 2002 / Rural Cooperatives

NEWSLINE

MFA Inc. hosts President Bush 

President George W. Bush spoke to a crowd of 900 people who gathered

in the warehouse at MFA Inc.’s feed mill in Aurora, Mo., in January. President Bush’s remarks focused on the need for economic stimulus, especially

as it relates to agriculture. “If we’re talking about the economic health of

the country, we’ve got to always understand it begins with a healthy farm

economy,” Bush said. 

He also stressed the need for a trade policy that boosts exports of American agricultural products. “If you’re the best in the world at what you do—

which we are in farming—then it seems to me we ought to encourage that

product to be sold not only here in America, but to level the playing field so it

can be sold across the world.” 

The president also touched on the war on

terrorism. “If the goal of government is to

create an environment in which people are

willing to take on risk, one of the things the

government must do is work

hard to create confidence in

the people.” Bush said the

best way to do that is to

“prevent the evil ones from

hitting us again.” 

The cooperative did not

have much time to plan for

the event, said Joe Powell,

vice president of the feed

division of MFA, a marketing and farm supply co-op

that serves 45,000 active

members in Missouri and

adjacent states. “Our

employees all pitched in

with enthusiasm and pride,

working extra shifts over

the weekend to get ready

for the president’s visit,” Powell said. “We all felt honored. We also felt

both pride and relief that this event came off so smoothly.” ■

Photo by James Fashing, Courtesy MFA Inc.’s “Today’s Farmer”magazine 

Top: U.S. White House Photo by Eric Draper 
of the 2001 total, up $25.5 million

from 2000. Net income was just under

$5 million, up sharply from $316,000

in 2000. The cooperative harvested

2.06 million tons of beets from 94,900

acres and sliced 2 million tons. 

David Roche, the cooperative’s new

CEO, told members, “Our shareholders recently received their final payment of $89.6 million for the 2000

crop, the result of doing the right

things right.” He said the cooperative

needs to remain focused on its core

business and to control costs. 

Meanwhile, Tom McKenna, CEO

of United Sugars Corp.—the sugar

marketing-agency-in-common of

Minn-Dak, American Crystal Sugar

Corp and Southern Minnesota Beet

Sugar and cane sugar companies—

said NAFTA-related trade issues with

Mexico present a major challenge for

the domestic sugar industry. United

Sugars plans to market liquid sugar

made by its member refinery in

Florida. Its expansion will be completed this fall. 

National Grape says

Welch’s not for sale

Whether it was just a long-term

planning business exercise or a test of

the financial market to see what someone might offer, the National Grape

Cooperative has issued a strong “no

thanks” in regard to the possibility of

putting Welch’s Foods and its worldfamous brand grape products on the

trading block. The board announced

its unanimous decision in February that

Welch’s is not for sale.

Speculation had gone so far as to

suggest what interested grower-owners

might net from a sale, based on their

tonnage and acreage. Figures in the

hundreds of thousands of dollars—

reaching more than $1 million in many

cases—were being discussed. The

mere suggestion stirred deep emotions

and long-held loyalties, traditions and

family histories.

The board of directors, elected to

represent the more than 1,400 growers

in New York, Ohio, Pennsylvania,

Washington State, Michigan and

Ontario, met in Erie, Pa., and decided

the sale was not in the best interest of

the membership. President Fred Killian noted that discussions about the

sale of Welch’s have occurred from

time to time over the decades. But he

quickly pointed out that the cooperative was neither on the market nor

considering any offers. He said the

board would not entertain any such

ideas unless backed by a majority of

the membership. 

The cooperative has owned Welch’s

since 1952, although the firm’s history

goes back to 1869. The cooperative’s

origins stretch back to the Great

Depression, when Jack Kaplan, an eastern businessman, formed National

Grape Corp. He helped create the present cooperative in 1945 by merging

smaller cooperatives.

Welch’s owns processing plants in

Michigan, New York, Pennsylvania and

Washington. Financial pressures in the

farming business have been taking a

toll. Area growers suffered one of their

worst seasons last year, when

production fell 67 percent

from 2000 due to wild temperature swings last May and

June. Growers also are concerned about imports. They

see the apple industry in a

state of upheaval caused by 5

years of the Chinese dumping

vast quantities of frozen apple

juice concentrate on the market. There are similar fears

regarding grape juice from

Argentina. Some felt the sale

could spell the end of a prosperous U.S. Concord grape industry.

The cooperative guarantees it will buy

members’ grapes. But in turn, members

must meet Welch’s standards for grapes

regarding sugar content and other

qualities and must sell their grapes only

to the cooperative.

Sales last year reached $650 million,

up from $419 million a decade earlier.

Last November, Welch’s cut 50 jobs

when it closed its general offices and

old corporate headquarters at Westfield, N.Y. The company employs

more than 1,300 people. 

Sales record set by

Diamond Walnut 

Diamond of California, a walnutgrowers’ cooperative at Pleasanton,

Calif., reported a banner performance for

2001 with its third consecutive year of

double-digit growth. Record gross sales

of $307 million were recorded, up 15

percent from 2000. Net proceeds were

$133 million, up from $125 million.

Earnings for grower-owners increased 32

percent, on a price-per-pound basis, from

fiscal 2000. Factors contributing to the

strong performance were expanded product offerings and marketing initiatives

that helped to build demand. 

Diamond has introduced new items

in its Harvest Reserve line of nuts,

including pecan halves and whole

almonds. The co-op says the product

line features premium nuts with superior color, texture and flavor. Diamond is expanding its product line to

include even more premium nuts suited for home meals, baked goods and

on-the-go snacking.

In other news, Diamond of California Chairman John J. Gilbert received

one of two director of the year awards

from the National Council of Farmer

Cooperatives, presented during its

annual meeting in Orlando. His award

was for a director with more than 2

years experience.

CHS opens stock offering

A rare public stock sale by a prominent agricultural cooperative is underway in the Upper Midwest under the

auspices of CHS, Inner Grove Heights,

Rural Cooperatives / May/June 2002 27

Diamond Walnut’s latest addition to its Harvest

Reserve product line. Photo courtesy Diamond Walnut 
28 May/June 2002 / Rural Cooperatives

Minn. CHS, recognized in many rural

communities by its red and white bowtie logo, seeks to raise $50 million by

selling preferred, non-voting stock at $1

per share ($1,000 minimum) at 8 percent annual interest. This is the first

time in the cooperative’s history that it

has gone outside the membership or

cooperative system to raise capital. Most

often, cooperatives generate capital by

holding member equity for later payment or borrowing from CoBank. The

money will be used to pay down shortterm debt and make cash available for

growth and other uses. Eventually, the

cooperative may use changes in the federal law which permit it to convert

member equity into preferred stock. 

Last year, CHS had sales of $8 billion and net income of $178 million. It

provides 1,200 member co-ops owned

by 350,000 farmers with farm production supplies, grain marketing and food

processing services.

Agway to sell four divisions

With an eye toward improving profitability by concentrating on its core

business, Syracuse-based Agway Inc.

has announced plans to sell four divisions not directly related to its farm

production supply business. The businesses are: Telemark (leasing), Agway

Insurance, Seedway and its agronomy

business. Spinning off the agronomy

and seed businesses are an aftermath of

Agway shifting many retail farm stores

to Southern States in recent years. 

Being retained are animal feed and

nutrition, energy products, fresh produce and agricultural technology units.

“These businesses have combined annual sales exceeding $1 billion (75 percent

of the co-op’s total annual sales) and

they have a clear history and connection

to our farm and cooperative heritage,”

said Agway CEO Donald Cardarelli.

Farmer co-ops registering

.coop Internet names

Corn-er Stone Farmers Cooperative

(see page 14 for more on this co-op) is

one of a number of ag cooperatives staking out addresses on the Internet’s new

“.coop” domain. Corn-er Stone, a

farmer-owned ethanol co-op in southwestern Minnesota, has registered a

number of generic names, including:

ethanol.coop, corn.coop and wind.coop.,

as well as cornerstone.coop. Corn-er

Stone manager David Kolsrud, who says

he believes the Internet is a good way to

increase the visibility of value-added

processing cooperative ventures, acted

quickly to register the names. 

The National Cooperative Business

Association, which oversees the .coop

domain, reports that other ag cooperatives that have registered .coop names

include: Ag Processing Inc., Agway,

Cabot Creamery, CHS, Growmark,

Sunkist, Grainland Cooperative, MinnDak Farmers Cooperative, Knouse

Foods, National Co-op Refinery Association and West Central Cooperative.

More than 40 percent of the 1,200 U.S.

rural utility cooperatives and some 800

credit unions were among the early

registrants. NCBA estimates that,

worldwide, 750,000 cooperatives serving about 760 million members are eligible for the .coop Web address.

It costs $80 per year to register a

.coop name, with an initial 2-year 

minimum purchase required. The fee

enables NCBA to ensure that only true

co-ops register as such. To buy .coop

names, go to www.coop. If you have

questions or need registration assistance, e-mail the dotCoop Operations

Center at: support@communicate.coop,

or call (toll free) (866) 288-3154.

DFA grows in bold moves 

“A fourth consecutive year of strong

financial performance coupled with

strategic moves positions Dairy Farmers of America (DFA) to continue to

grow and serve dairy farmers,” CEO

Gary Hanman told delegates at the

recent annual meeting in Kansas City.

In one bold move, he said, DFA sold its

largest asset, a 33.8-percent share in

Suiza Food Group, reinvesting the

proceeds into a 50-percent share in the

new National Dairy Holdings (NDH).

By year end, NDH had grown to be

the nation’s largest privately held fluid

milk operation, with 28 bottling plants.

The equity interest in NDH “gives us

even wider market opportunities and a

tremendous growth vehicle.” DFA

remains a major supplier of the new

Dean Foods Co. 

In 2001, DFA sales climbed from

$6.7 billion to $7.9 billion and assets

from $1.9 billion to $2.1 billion. The

cooperative marketed a record 28 percent of the nation’s milk, or 45.6 billion

pounds, even while nationwide production declined. Average price paid to

members was $15.22 per hundredweight, up $2.58 from 2000.

Meanwhile, DairiConcepts, a joint

venture between DFA and NZMP, the

ingredient business of New Zealand’s

Fonterra Cooperative Group, is being

expanded to produce an extensive range

of ingredients at Portales, N.M. It will

be the first commercial producer of

milk protein concentrates (MPC) in the

United States. It will also produce other

dairy ingredients for many markets in

the fast growing convenience food sector. DFA will provide the plant’s milk

supply. 

In other developments, DFA’s American Dairy Brands division has introduced Borden fresh shredded cheese

and macaroni dinner, which will be

found in the dairy case of supermarkets.

It will be backed by an aggressive radio

advertising campaign. 

Through its Borden brand, DFA is a leading innovator in new cheese products.

Photo courtesy DFA
Rural Cooperatives / May/June 2002 29

GROWMARK has launched an extended celebration of

its 75th anniversary as one of the nation’s leading cooperatives. Events will culminate Aug. 28-29 at the regional

cooperative’s 2002 annual meeting in Chicago. Theme for

the festivities is “Share the Spirit, Share the Dream.”

Today’s GROWMARK farm supply and grain marketing

system serves local cooperatives in Illinois, Iowa and

Wisconsin and the Canadian province

of Ontario.

GROWMARK’s roots go back to

1926, when farm power was being

converted from horses to tractors.

That created a need for gasoline,

kerosene and lubricating oil. Farmers

were having difficulty finding a reliable

supply of petroleum products. Major

oil companies had little interest in

serving sparsely populated areas

because it increased their operating

costs. So farmers in nine Illinois counties formed the Illinois Farm Supply

cooperative to gain greater control,

purchase a larger volume and ensure

a consistent supply of vital petroleum

products. In time, the product line

would be greatly expanded into other

farm supply commodities. Its farmermembers gained a market for their grain and obtained

related services.

“Our mission remains virtually unchanged from 1927,”

says Bill Davisson, GROWMARK’s chief executive officer.

“Although technologies and services have changed, our

goal continues to improve the long-term profitability of our

member-owners. Creating innovative ways of meeting

needs and exceeding expectations is what the past 75

years has been about–and our charge for the next 75

years and beyond. Our vision is to be the best agricultural

cooperative system in North America.”

In line with consolidations in farming and supporting

agribusiness, mergers continue within GROWMARK’s system, both on the local and regional level. Nearly 2 years ago,

for instance, a trio of locals in the heart of the Illinois grain

belt—McLean County Service Co., Woodford FS and Livingston Service Company—formed Evergreen FS. Its sales

from 6,200 farmer-members last year topped $100 million. 

Like its local co-op members, GROWMARK has grown

as well, into a farmer-owned company with $16.3 million in

earnings and $1.3 billion in sales. The system employs 400

people at its Bloomington headquarters, another 236

throughout the Midwest and 106 in Canada. 

Meanwhile, the National Council of Farmer Cooperatives has honored Dan Kelley, GROWMARK’s chairman of

the board, with its director of the year award during the

council’s recent annual meeting. He was cited for his

understanding of his cooperative, good leadership and

business judgement and the ability to

effectively communicate. Kelley farms

2,300 acres of corn and soybeans in

partnership with his two brothers near

Normal, Ill. He has been on the regional

board for six years and its chairman

since 2000. He is only the sixth person in

the cooperative’s history to lead the

board. Kelley also heads the board of

Evergreen FS, one of the regional’s

member companies.

GROWMARK is also making efforts to

encourage environmentally sound farming practices. It plans to supply $15,000

in grass seed and other funds to boost

conservation efforts in Illinois and Iowa.

Vice President Vern McGinnis signed

agreements with Trees Forever, which

has developed Illinois and Iowa buffer

partnership programs. The program 

promotes voluntary efforts to plant and maintain grass conservation buffer strips along streams, rivers and other

waterways. Buffers improve water quality by trapping up to

90 percent of sediment and 80 percent of nitrogen contained in surface water runoff. “Our cooperatives are committed to earth-friendly agriculture,” McGinnis said. “For

years, we have supported conservation efforts that promote

clean air and water, encourage healthy wildlife populations

and ensure long-term productivity of the land. As proactive

environmentalists, our farmer-members live on the land and

have a vested interest in keeping it clean.” 

GROWMARK has also long been known for its commitment to cooperative education, through efforts such as an

essay contest that asks FFA members in Illinois, Iowa and

Wisconsin to write about the cooperative way of doing

business. GROWMARK and FFA have sponsored the contest for the past 9 years. A winner from each state earns a

$300 scholarship, as do their FFA chapters. Aside from

improving writing skills, the contest increases understanding of current issues in agriculture and the cooperative

way of conducting business. 

GROWMARK “Shares the Spirit” to mark 75 years of co-op service 

GROWMARK Chairman Dan Kelley, right,

receives the NCFC Director of the Year

award from Don Schriver of DFA (center)

and 2001 award winner Jack Hardesty of

Maryland-Virginia Milk Producers.
30 May/June 2002 / Rural Cooperatives

Wilson succeeds Lyon at CRI

R. Douglas Wilson has been named

as new chief executive officer at Cooperative Resources International (CRI),

Shawano, Wis. He succeeds Tom

Lyon, who retired March 1. Chairman

Roger Borgwardt said Wilson had

considerable experience in the dairy

and livestock industry and “proven

leadership capabilities in the cooperative businesses.” Most recently, he had

been chief operating officer of CRI’s

cattle breeding subsidiary, Genex

Cooperative. 

Wilson credited Lyon with leading

the co-op through “the most significant

era this organization will experience.

He was the architect and accepted the

challenge of proving his worthiness to

the cooperative world.” 

Wilson served as president of the

National Association of Animal Breeders, the artificial insemination industry’s trade association, for 3 years and

held a similar post with the Wisconsin

Federation of Cooperatives, which has

honored him with its cooperative

builder award. The World Dairy Expo

named him its industry person of the

year in 1993. He currently serves on

the Wisconsin state fair park board and

the food and environmental sciences

advisory board of the University of

Wisconsin-River Falls.

CF Industries honors 

four watershed groups

The Conservation Fund has

announced that four watershed groups

are the recipients of the 2001 CF Industries National Watershed Awards. Each

recipient has demonstrated effective,

non-regulatory approaches to improving water quality. The winners are:

■ Duck Creek Watershed Management Project in Juneau, Alaska;

■ Tri-State Water Quality Council,

Sandpoint, Idaho;

■ Riverland Conservancy, Madison,

Wis.;

■ Lake Champlain Water Basin

Program, Grand Isle, Vt.

“These recipients demonstrate that

great things can be accomplished to

improve our watersheds through leadership, cooperation, commitment and

innovation,” said Robert Liuzzi, CF’s

president and chief executive officer.

The winners were recognized for

stream and wetlands restoration, reductions in runoff pollution, building partnerships, community outreach and

education. CF Industries, which is

owned by nine regional cooperatives to

which it distributes fertilizer products,

originated the award in 1996. It annually recognizes three communities and

one corporation for their water conservation efforts. 

Ocean Spray, Nestle

in bottling venture 

A cost-cutting, long-term bottling

alliance has been formed by the

Ocean Spray cranberry cooperative

and the U.S. division of Nestle S. A.,

the Swiss beverage company. The

cooperative will bottle two Nestle

beverage lines and together the firms

will buy packaging and ingredients

and establish an economy of scale that

will boost mutual profitability. An

Ocean Spray spokesman said the pact

should not be considered a prelude to

the possible sale of Ocean Spray to

Nestle. Members voted down a proposal in 2000 to sell the cooperative,

which some members had suggested

because a cranberry glut was depressing grower prices. Ocean Spray

recently announced the sale of its

Nantucket Nectars business, which it

purchased in 1997, to Cadbury

Schwepps so the cooperative can concentrate its attention on the cranberry

juice business, particularly the new

white cranberry juice. 

‘New Cooperative Horizons’ 

NICE theme for Chicago 

Challenges and opportunities facing cooperatives in a highly competitive

environment will be examined under the theme of “New Cooperative Horizons,” during the 74th annual National Institute on Cooperative Education

(NICE). The event will be held in Chicago Aug. 5-7. The NICE program will

center around 15 sessions examining topics such as: how cooperatives can

benefit from mega trends in agriculture and the food system, Brazil’s position

in international trade, and implications of domestic farm policy changes for

cooperatives.

Other topics include: the role and future of the Chicago Board of Trade; the

role and responsibilities of co-op audit committees and benefits derived from

agricultural and cooperative research. Other sessions will examine the economic outlook for U.S. and world economies, the importance of business relationships, challenges of financing cooperatives, home-grown fuels and U.S.

energy policy, employment laws and issues and the evolving food system.

For registration information, contact: Tom Little, NCFC Education Dept., 50 F

St. NW, Suite 900, Washington, D.C., or phone (202) 626-8700, or visit the NCFC

Web site at:www.ncfc.org. ■

R. Douglas Wilson and friend.
Rural Cooperatives / May/June 2002 31

Co-op buys Michigan Sugar 

Sugarbeet growers—more than

1,000 strong and organized as Michigan Sugar Beet Growers Inc.—have

completed purchase of Michigan Sugar

Co. at Carrolton, Mich. The $64.5

million sale took 2 years of negotiations with the owner, Texas-based

Imperial Sugar Co. Later this year, the

cooperative’s 1,038 members from 11

counties will elect a new 11-member

board of directors. Imperial was paid

$29 million in cash, $24 million of it

raised from the sale of stock to the

grower-owners. The remaining cash

came from a 5-year loan from the state

of Michigan. The cooperative will still

owe Imperial for a 10-year, $16 million

loan at 8 percent interest and will begin

repaying $18.5 million in Michigan

Industrial Development Bonds at 6.5

percent interest in 2015. 

Sugar produced by the cooperative

under the Pioneer brand will be marketed by Imperial for the next 10 years.

The pulp and molasses will be marketed by the cooperative. Processing facilities are centered in Michigan, Ohio and

Ontario. Mark Flegenheimer is president and chief executive officer of the

cooperative, which will hire 350 fulltime and 1,000 seasonal employees. 

Farmers Union turns 100

“still fighting for producers”

The National Farmers Union,

founded in 1902 as the Farmers Educational Cooperative Union of America,

is marking its100th birthday in the

same way it started out: working to

enhance the competitive status of its

300,000 members in 24 states. It

recently announced it will ask Congress

to investigate whether big investors and

multinational companies are manipulating grain and livestock markets to the

detriment of producers. Farmers Union

says it wants to know why grain markets

don’t seem to rise when supplies tighten, which it blames on large investors

who can cause the market to rise and

fall in a short time period. It is also

seeking a moratorium on patents for

new, genetically modified organisms.

When Farmers Union started, it was

illegal to form a union for negotiating

commodity prices, so it pushed for new

laws to protect the nation’s small farmers and rural communities. One of the

organization’s priorities is to promote

development of cooperatives and communications technology. 

At its recent, 100th annual meeting

in Irving, Texas, members elected

David Frederickson, a former state senator from Roseville, Minn., as its new

president. He succeeds Leland Swenson, a long-term advocate of cooperatives during his years as president.

Some 20 buses were used to take those

attending the meeting to Point, Texas,

to visit the organization’s first meeting

place. There they installed a plaque at

the cemetery where some of its

founders are buried.

The words of Farmers Union

founding member Newt Gresham,

quoted in a 1902 newspaper article,

were recalled during the event: “With

their bare, calloused hands and strong

backs, the farmers converted the countryside from a wilderness into fertile

farmland. Now the farmer is hurting,

and being manipulated. We need a

voice. We need an organization to fight

for the rights and survival of family

farmers. That’s why we founded Farmers Union. This is just the beginning.” 

Mandan co-op gets 

new lease on life

The slide started a couple years ago

when grain being stored at Mandan

(N.D.) Farmers Elevator spoiled. The

cooperative lost a load of money, and its

bonding and warehouse license was lost

in May 2000. A summer stock sale

meant to rescue the co-op fell short. The

Main Street fixture was put up for sale,

but nobody would buy it, and members

voted to dissolve the cooperative.

Later, however, they recanted and

conducted another stock drive that

raised $97,000. The Mandan city commission approved a $25,000 loan from

its growth fund in December and

another $13,000 in January. Farm

Credit Services of Mandan offered a

line of credit. The financing and grants

enabled the cooperative to regain its

license. The co-op’s grain and feed

business have now both resumed. Jeff

McGregor, credited for turning around

another elevator, has been hired as the

new general manager.

Kansas co-op leader

honored for service

The Kansas Society of Association

Executives has honored Joe Lieber,

president of the Kansas Co-op Council

since 1986, as its association executive

of the year. Lieber was cited for his

excellence in leadership and participation in association activities. He served

on the society’s board for 10 years and

as its president in 1999. In 2001, he

was selected as Kansas association executive of the year. Lieber serves on the

board of directors’ executive committee

for both the National Council of

Farmer Cooperatives and National

Cooperative Business Association;

advisory committee of the Arthur Capper Cooperative Center at Kansas State

University; charter member of the

national Rural Cooperative Task Force;

past president of the Council of State

Cooperative Councils and Kansas

Cooperative Alliance; and a director of

the Kansas Chamber of Commerce and

Industry, for which he has conducted

more than 600 radio interviews on the

council’s AgByline program.

Co-op Hall of Fame 

inducts three

A prominent cooperative attorney, a

farm organization executive who promoted cooperative development and

the chief executive officer of an interregional farm supply cooperative were

inducted into the national Cooperative

Hall of Fame in Washington, D.C.,

April 24. The Cooperative Development Foundation administers the program. Honorees, whose contributions

to cooperatives were considered “genuinely heroic” include: Ralph K. Morris, who died in February 2002. The

nation’s leading cooperative attorney,

he served as legal counsel for three

decades for Cooperative Resources

International (CRI) at Shawano, Wis.,

the first holding cooperative in the
32 May/June 2002 / Rural Cooperatives

United States, which he developed.

He also helped create numerous newgeneration cooperatives and was pivotal in restructuring countless cooperatives to improve their operations.

C. William Swank is the former

executive vice president of the Ohio

Farm Bureau Federation who spent 40

years strengthening the economic vitality of farmers through cooperative

action. He was a tireless educator who

extolled the virtues of cooperatives and

encouraged others to embrace them,

teaching directors, youth and farmers

alike. He also helped found Cooperative Business International, which provides international trade opportunities

for U.S. cooperatives.

Francis L. Lair helped found Universal Cooperatives, an interregional

farm supply cooperative, and was its

first chief executive officer. Lair devoted more than 40 years to cooperatives,

served on the board of MSI Insurance

and National Cooperative Business

Association and worked closely with

the Minnesota Association of Cooperatives and Group Health Mutual Insurance Co.

Gold Kist fetes egg farmers

Atlanta-based Gold Kist Inc. recently presented its first annual producer of

the year award to Brickle Egg Farm,

owned by Thomas and Andy Brickle of

Cope, S.C. Chairman Dan Smalley said

the award was originated because the

cooperative was refocusing on its poultry business and the importance of producer-members in it. The Brickle Egg

Farm was chosen by the board’s member relations committee from nominees

in Gold Kist’s nine divisions and more

than 2,300 poultry producers. Award

criteria included performance in the

division, poultry housing conditions,

community involvement, environmental management and support and advocacy of Gold Kist. The Brickles’ operation has a capacity of 27,000 hens

producing 4 million eggs per flock.

The award carries a $1,000 cash prize.

Farmland to sell Tradigrain;

joins in wheat sale to Cuba 

Citing the need to concentrate more

on its core business, Farmland President Bob Honse has announced the sale

or closing of Tradigrain, the cooperative’s international grain trading subsidiary. Less than a year ago, Farmland

developed a joint grain venture partnership with Archer Daniels Midland

(ADM), a major international grain

marketer. Tradigrain has less than 100

employees in 11 countries, including an

office in Memphis. Farmland purchased

Tradigrain in 1993 and its investment

was paid off in the first 5 years. Honse

said Farmland wants to concentrate on

serving its local cooperative owners

through marketing joint ventures in

farm production supplies and grain and

developing its meat business. 

In other Farmland news, the co-op

recently participated with ADM in the

$9.4 million sale of hard red wheat to

Cuba. This was the second shipment

since Jan. 1. 

Farmland has also agreed to sell its

feed phosphate operation in

Joplin, Mo., to Potash Corp. of

Saskatchewan (PCS), the world’s

largest fertilizer company. Farmland had owned the Joplin plant

for almost 50 years.

Dakota Growers Pasta 

eyes conversion to C-corp. 

Dakota Growers Pasta in Carrington, N.D., which has been

looked to as a model new-generation cooperative, plans to ask its

members to vote on whether to

convert their cooperative into a

privately held corporation. The co-op’s

board, which voted to recommend the

change to its more than 1,100 members, says the change is needed both to

bring in more investment capital and

because members’ ability to grow

durum wheat has been reduced by poor

weather and plant disease. As a result,

members have increasingly been purchasing durum from a non-member

wheat pool, threatening the cooperative status of the business (which, by

law, must receive at least 51 percent of

its input from members). 

At press deadline for this magazine,

the proposal was being reviewed by the

Securities and Exchange Commission.

The process for the conversion—if

approved by the SEC and members—is

fairly complex, involving the creation

of three new subsidiaries, two of them

registered in Colorado, which, unlike

North Dakota, permits a co-op to convert into a corporation. 

An article in the April 8 issue of “Ag

Week” newspaper quotes co-op members and others who have concerns

about the proposed conversion, including Roger Johnson, North Dakota agricultural commissioner. Johnson is quoted as saying he fears the change to a

corporate business structure would

undermine the goals of the new-generation co-op movement, which is to help

producers offset low commodity prices

with returns from processing their crop.

“(In a corporation) the loyalty is to the

stockholder, who is going to demand a

high rate of return. That will come at

the expense of the price you’re able to

pay for durum wheat,” he is quoted as

saying. If the co-op goes corporate,

“it’s going to be much harder to get

producers to invest in another valueadded venture,” he told “Ag Week.” 

Crestland co-op assets sold

By upping its earlier auction bid to

$6.5 million for the bulk of Crestland

Cooperative’s facilities in southwestern

Iowa, DeBruce Grain of Kansas City

quieted objections from five bondholders, who held part of Crestland’s debt

of $16.5 million owed to major creditors. A recent auction raised only $10.5

Thomas and Andy Brickle were selected as Gold

Kist's’ producers of the year from the co-op’s more

than 2,000 producers. Photo courtesy Gold Kist
Rural Cooperatives / May/June 2002 33

2—can be used to present the general

view of a cooperative’s situation and

plans for the future. For more specific

details, members should be provided

with additional information about the

precise circumstances confronting the

cooperative and critical aspects of the

strategic efforts being considered or

implemented. 

Failures point to

need for stronger effort 

The cooperative transformations

that Fulton describes are occurring in

the cooperative business world today

and these circumstances beg the question: How well are cooperatives communicating these transformations to

members? While many have surely

done a good job, evidence of failed

cooperative strategic efforts (e.g., unifications, joint ventures) suggests that

good communication with members

isn’t pervasive in the cooperative arena. 

Communicating cooperative industry position and concrete reasons for

strategic action may not always yield

the results the board intended. Members may resist significant change for

other reasons. However, it remains

critical that the board and management

be forthright and informative to members about where their cooperative fits

in its industry and what types of strategic efforts may be needed for better

positioning in the short and long term.

As Fulton prescribes, “...members

need to understand the forces leading to the

changes in their economic environment....”

Members must also understand what

their cooperative needs to do to counter

such forces to thrive and survive. As

owners, members must be educated and

knowledgeable about such matters. It is

their responsibility to work toward that

end as well as the responsibility of

directors and managers to provide

members with critical information to

level the learning curve. Meeting these

responsibilities head-on is an imperative for the future of cooperatives. ■

million. Some of the northern tier

facilities were purchased by local area

cooperatives. An attempt by some former members to form a replacement

cooperative to purchase some elevators

failed to raise the needed money. 

At one point, the 70-year-old Crestland cooperative had 225 employees,

17 business operation locations and

2,500 members. It had expanded

beyond its original grain business into

construction, a home improvement

store, real estate and a $22 million soybean processing plant. The Iowa

Indemnity Fund paid up to 90 percent

of farmer claims for unpaid grain delivered to Crestland.

Trying, positive year

for Tenn. Farmers 

Fiscal 2001 was trying, but also positive for Tennessee Farmers Cooperative. It reported the first loss—$7 million—in the regional cooperative’s

history. Overall sales topped $430 million, consistent with budgeted projections, said Chief Executive Officer Vernon Glover.

The loss was largely due to accounting problems and replacement of a

software program to better serve its

member cooperatives. The program

had been causing daily problems, he

explained, and in the end it had to be

replaced with a modification of the

original system.

On the positive side, TFC returned

$6.4 million in cash to members and

sold near-record amounts of fertilizer.

Its crop protection products sales volume grew with the introduction of

more generic products. TFC also

Adapting to change continued from page 25

by law, responsibility to establish the

cooperative’s policies. Members must

not undermine the board of directors,

either directly or by planting doubts

and dissension among members. When

members have questions, the board has

most likely already considered the

issue. The best practice is to inquire of

the board of directors first. If the board

perceives a deficiency in communication generally, it may establish procedures for handling questions in the

management system. 

To re-emphasize: members should

clearly understand that the board of

directors they selected establishes the

cooperative’s policy as representatives

of members. 

The positive approach

In today’s economy, cooperatives

cannot be static or slow to act. Change

is in the air, and cooperatives need a

positive, dynamic and creative approach

to the markets in which they operate.

The type of inquiry suggested in this

article is in no way intended to restrict

creative, rapid, significant or effective

response to the needs of the marketplace. To the contrary, this type of

questioning is positive, not negative; it

is forward-looking, not reactionary. But

these questions are vitally important. 

Perhaps change—even significant

change—in the cooperative is due. It

may be time for a new look at structure, operating methods, bylaws or

policies. Perhaps a substantial response

to dynamic market forces is indeed

required.

The central focus of members’ interest in the future of their cooperative—

the basis for questions discussed here—is

to preserve the value, and values, of their

cooperative so it can benefit its members

as producers of agricultural products in

the manner mandated by fundamental

principles of cooperation. ■

Ask the right questions continued from page 22
feasibility study outlines differently, you

should plan on raising between 40 percent and 60 percent through your membership. However, for some projects, it

may be necessary to raise 125 percent of

the total needs. The extra 25 percent is

necessary to help carry the new venture

as it begins to establish its brand.

The final monetary component of a

comprehensive business plan is the

cash flow, or capacity. Capacity

depends on several factors:

• What are the economic conditions?

• What does the competitive marketplace look like?

• What’s the need or demand for

the goods and services sold?

• Are there, or are there going to

be, technology changes?

• What’s the government going to

do?

• What’s the cycle of the industry?

• And, are there any environmental

effects?

As we look at ethanol today, every

one of these components is critical in

determining whether or not to enter

into a biomass or ethanol project. In

today’s economy, ethanol is only worth

95 cents to $1 per gallon. This illustrates why producing competitively is

so important. As more and more plants

come on-line, and as existing plants

expand, production increases. So, in the

long run, it will be the least-cost

provider who will survive these periods. 

Basically, the need for goods and services is the same thing as supply and

demand. The big questions in ethanol

are, “Will California continue to use

MTBEs? Or will it have to use ethanol?

If California has to use ethanol, will a

foreign country produce it, or will it

buy it here in the United States from

U.S. production?”

Some of the technology changes that

should be reviewed, if you’re considering starting an ethanol plant today, are:

• How fuel sales will impact the

industry and the future of ethanol.

• What the government will do

when the incentives run out.

• Whether or nor there will be any

environmental threats that could

change ethanol.

Final steps

Once the in-depth steps of the feasibility study and business plan are completed, you need to find an attorney

who will prepare a prospectus. This

statement outlines the main features of

the new business, and is necessary

whenever a company issues stock. Its

primary objective is to disclose all risks

associated with that investment. 

After the prospectus has been prepared, you can begin your membership

drive. Then you can hold your annual

meeting.

You should not seek financing for the

project until all these stages are complete. Groups often feel they need to talk

to a lender about a financing request

before completing the feasibility study.

However, a good and true feasibility

study will outline the capitalization or

equity you need to raise in order to be

competitive.

Once the financing is in place, you

may need to hire a manager, if you

have not done so already. Hiring a

manager is one step you can do before

the others, as long as you have enough

seed money to pay him or her. 

Finally, you will construct your plant

and begin the operation.

Keys to success

During the past decade of looking at

added-value ventures, CoBank has

come up with what we feel are the three

most important keys to success—leadership, communication and capacity.

Leadership should be local. It should

consist of local producers who are willing to put their reputations and their

money at risk. Leadership should not

come from engineering firms, marketing companies or economic developers.

In addition, an excellent management

team that’s capable of developing and

implementing sound business and marketing plans is critical, as is a wellthought-out risk management plan.

Successful added-value ventures also

are well capitalized and able to cushion

for unplanned adversities. They have

40 percent to 60 percent equity that’s

been raised by their investors.

The final essential key to success is

communication. This means frequent,

open and honest communication with

the investors. It means communication

that focuses on the value of their stock

or their investment, not just the production statistics. And it means communication that is developed from the perspective of an added-value processor, not a

commodity or livestock producer.

There’s an old saying, “Nothing ventured, nothing gained.” Following all of

these steps carefully, accurately and in

proper order can make all the difference

in determining whether your added-value venture achieves success. ■

34 May/June 2002 / Rural Cooperatives

increased its share of the seed market.

Several member cooperatives are building new stores and 18 others are renovating or remodeling existing stores to

display more inventory and add new

product lines. Tire operations were

expanded into 18 co-op outlets in Tennessee. Under the Ag Equipment

umbrella, its newest department,

equipment is being sold in 25 states

with expansion into other states likely.

Cooperative marketing efforts in

Arkansas also have been successful.

In the officer election, the board

chose Johnny Daniel of Charlotte,

Tenn., as the new chairman. Eddie

Wilson of Cleveland, Tenn., succeeded

Daniel as vice chairman.

Correction

The authors of the article on the

Tree Top apple cooperative in the

March-April 2002 issue of “Rural

Cooperative” were: Carmi Lyon,

Cathy Durham and Steve Buccola, all

of Oregon State University.

Getting the green light continued from page 19
Rural Cooperatives / May/June 2002 35
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