Cooperative

Petroleum

Operations

FARMER COOPERATIVES IN THE UNITED STATES

COOPERATIVE INFORMATION REPORT 1

SECTION 23

UNITED STATES DEPARTMENT OF AGRICULTURE

RURAL BUSINESS /COOPERATIVE SERVICE
Cooperative Petroleum Operations

Issued April 1985

Revised March 1996

Cover...

Cooperatives provided more than 40 percent of farmers’ petroleum

needs. Five regional cooperatives owned 4 refineries, such as this one

at CofSeyville, KS, owned by Farmland Industries, Inc., Kansas City,

MO.
CONTENTS

Overall Status of Cooperatives . . . . . . . . . . . . . . . . . . . . . . . . . . . .l

Cooperative Petroleum System . . . . . . , . . . . . . . . . . . . . . . . . . . .2

Crude Oil Production ..................................2

Early Developments ............................ .2

Current Operations ............................. .5

Refining and Blending ................................ .6

Early Developments ............................ .6

Current Status of Plants and Operations ............. .8

Wholesaling .........................................9

Early Developments ............................ .9

Current Status ................................ .lO

Facilities and Operating Practices ................. .12

Retailing .........................................

..13

Early Developments ........................... .13

Current Status .................................13

Facilities and Operating Practices ................. .17

Related Supplies .....................................20

Petroleum Equipment .......................... .20

Tires, Batteries, and Related Services .............. .21

Challenges and Opportunities .......................... .22

Challenges.. ................................

..2 2

Opportunities ..................................25

i
Cooperative

Petroleum

Operations

Cooperatives play a vital role in supplying petroleum products

to U.S. farms and provide services at all related levels of oil production, refining and processing, wholesale and retail distribution,

and related supplies.

Farm use of liquid petroleum products and liquefied petroleum

(LP) gas or propane increased from less than a billion gallons in

1920 to more than 9 billion gallons in 1969. Use then declined to

about 5.5 billion gallons by 1993, due to petroleum price increases,

increased fuel efficiency in farm equipment, and adoption of lower

tillage practices.

Diesel and gasoline are the most important fuels used to

power farm equipment. Propane, home heating oil, and kerosene are

used in farm production for drying crops, fueling irrigation pumps, and

heating poultry and livestock facilities.

Fuels used on farms have changed considerably. In 1950,

gasoline constituted about two-thirds, diesel 10 percent, and propane

less than 1 percent of petroleum use. By 1993, gasoline had declined

to 26 percent and diesel and propane had increased to 60 percent and

14 percent, respectively.

Overall Status of Cooperatives

In the late 1920s and 193Os, farmers in many parts of the

United States organized local petroleum cooperatives or added

petroleum to grain marketing cooperatives. Farmers soon realized,

however, that retailing operations alone were inadequate to meet their

needs for a dependable supply and quality at a reasonable price.

Local cooperatives organized regional wholesale cooperatives to pur-
chase petroleum products, blend lubricating oil, and provide transportation services. Later, wholesale cooperatives, by themselves or

with others, began to refine petroleum for much of their needs and produce a limited amount of the crude oil processed in their refineries.

By 1993, U.S. farmers purchased about 41 percent of their petroleum

needs from about 2,500 cooperatives, more than two-thirds of all

3,761 active marketing and supply cooperatives (table 1).

Five regional cooperatives, solely or jointly, own 4 refineries

that provide about 87 percent of the requirements of retailing cooperatives. Cooperative refineries received only 17 percent of their

crude oil from sources owned or leased by cooperatives.

Cooperative Petroleum System

The farmer cooperative petroleum system is composed of

about 2,500 autonomous cooperative businesses, operating under a

variety of organizational arrangements at each vertical level of the

petroleum industry from crude oil procurement through retail sales.

The structure of cooperatives in the petroleum industry is described

in figure 1. Interregional cooperatives are owned by groups of regional cooperatives. Regional cooperatives, if federated, are owned by

local cooperatives, and if centralized, owned directly by farmers. In

all cases, control ultimately rests in the hands of U.S. farmers.

Crude Oil Production

Early Developments

Soon after acquiring refineries, cooperatives believed exploring for and producing crude oil was necessary to assure an adequate

supply. This was the last step, along with transportation, in vertically integrating their petroleum operations. Some cooperative leaders

thought savings in production might be realized in years when savings

from refining were small.

In September 1940 in Kansas, Consumers Cooperative

Association (CCA) drilled its first producing oil well, after being

forced to shut down its new refinery at Phillipsburg, KS, for lack of

sufficient crude. The regional began leasing oil lands in Indiana and

Kentucky in 1941. By the end of 1950, 12 cooperatives were producing crude oil and leasing 63,488 net acres of producing leaseholds in the Midwest. These cooperatives were sole owners of 1,562

producing wells and part owners of another 383. They also held

3 10,032 acres of prospective lease holds, royalties, and mineral rights.

2
Table l-Cooperatives’ share of fuel used for U.S. farm production

Fuel used for U.S. farm production

Year/product Total fuel Total fuel Cooperatives’ share

provided by provided by of fuel used for

all sources cooperatives U.S. farm production

1993

All gasolines

Diesel fuel

Total liquids:

1,404,393 645,130

3,298,098 1,231,723

4,702,49 1

Propane or LP gas

Total all fuels:

761,204

5463,695

1988

All gasolines

Diesel fuel

Total liquids:

1,600,OOO 699,055

2,800,OOO 1,034,287

4,400,000

Propane or LP gas

Total all fuels:

600,000

5,000,000

1982

All gasolines

Diesel fuel

Total liquids:

2,385,241 1,124,932

2,93 1,690 836,698

5,316,931

Propane or LP gas

Total all fuels:

1,136,167

6,453,098

1979

All gasolines

Diesel fuel

Total liquids:

3,381,130 1,653,765

3,178,766 1,314,703

6,559,896

Propane or LP gas 1,301,867

Total all fuels: 7,861,763

1.000 gallons

1,876,853

37 1,700

2,248,552

1,733,341

209,864

1,943,205

1,961,629

423,699

2,385,328

2,968,468

48.9

41.4

45.3

553,660 42.5

3,522,128 44.8

Percent

45.9

37.3

39.9

48.8

41.2

43.7

36.9

39.4

35.0

38.9

47.2

28.5

36.9

37.3

37.0

3
Figure l-Cooperative involvement in various activities

in the U.S. petroleum industry, 1993

Activity

Local

Cooperatives

Regional

Cooperatives

Interregional

Cooperative

Wholesale

distribution

Farm sales

Nonfarm and

urban sales

None

Oil exploration

Crude oil

production

None

None

Very limited

Limited

Very limited

Limited

Refining None 3 regional owned

refineries:

CENEX,

Farmland, and

Countrymark

1 interregional

owned refinery:

National Cooperative

Refinery Association

Own or lease Own or lease

limited mileage limited mileage

of gathering and of gathering and

trunk lines trunk lines

Limited to a few

large locals

Extensive network

of storage and

distribution

throughout most

farming regions

Sales of solid

products

Extensive bulk

delivery and pump

station operations

Substantial in

some markets and

rural communities

Extensive bulk

delivery and pump

station operations

Substantial in

some markets and

rural communities

None

None

Crude oil production in 1950 from the 1,562 wholly owned

wells was 15,292 barrels per day. This represented 14.3 percent of the

total volume of crude oil processed by cooperative refineries that

year. Cooperatives shared a partial interest in 383 wells which produced another 14,108 barrels per day. The combined volume of 29,400

4
barrels per day represented 27.5 percent of the crude oil processed by

cooperatives in 1950.

In 1950, cooperatives drilled 145 producing wells and 77 dry

wells. Of these totals, 111 producing and 22 dry wells were wholly

owned by individual cooperatives. Between 1950 and 1970, cooperatives increased their crude oil production and refining capacity at

about the same rate.

During the crude oil shortage of the mid-1970s, cooperatives

launched programs to explore and develop alternate sources of supply. In one effort, 19 regionals organized International Energy

Cooperatives, Inc., Washington, DC, to purchase crude and refined

products, engage in exploration, and evaluate trading food and agricultural/industrial knowledge for petroleum in foreign markets (commonly referred to as “food for crude”).

In 1974, 15 of these regionals formed a separate company,

LVO International, Inc., Tulsa, OK, to explore for oil in Egypt,

Portugal, and Greece, but later discontinued operations. Three cooperatives and three noncooperative companies formed Seaway Pipeline

Company to move crude from tankers o’n the Texas coast to inland

refineries. Cooperatives later divested themselves from the money-losing operations.

Two interregional petroleum exploration and acquisition cooperatives were formed in the 1970s. Agri-Petco International, Tulsa,

OK, was owned by one regional and two interregional cooperatives.

International Cooperative Petroleum Association, New York, NY,

was owned by two U.S. regionals and several European cooperatives.

With limited resources and increasing costs, most cooperative oil

exploration ceased by the mid-1980s.

Current Operations

In 1993, cooperatives produced 1.5 million barrels of oil,

down 50 percent from 1988. During the same period, net proven

reserves also declined by 50 percent to 8.9 million barrels. In 1993,

cooperative refineries received only 17 percent of their supply from

these cooperative-controlled sources.

More than 90 percent of the crude oil received by cooperative

refineries was transported by pipelines. Cooperative ownership of

pipelines has increased over the past decade to more than 5,000 total

miles. Cooperative-owned or -leased transportation moved 43 percent

of the total crude oil needed by cooperative refineries in 1993.
Refining and Blending

Early Developments

The earliest effort by cooperative petroleum wholesalers to get

involved in product manufacturing came in blending lubricating oil

to improve the quality of oil to withstand rigorous use in tractors and

other agricultural equipment. Cooperatives in Indiana tried unsuccessfully to get the State legislature to pass a law requiring placement of oil specifications on a container tag. Next, they attempted

to buy oil from refiners on guaranteed specifications, but price fluctuations made this impossible.

In 1930, Indiana Farm Bureau Cooperative Association decided to build a compounding plant in Indianapolis. Later that year, it and

other regional cooperatives in Ohio and Michigan formed Farm

Bureau Oil Company, which operated the plant. In time, this organization became United Cooperatives, Alliance, OH, which blended

oil and purchased farm supplies for a larger group of regionals.

By 1950, cooperatives owned 13 blending plants. Volume

blended reached about 450,000 barrels in 1969, but declined to

403,000 barrels in 1982.

During the 1940s several wholesale cooperatives believed

they could realize additional savings by refining petroleum products.

Difficulty in obtaining fuels during and after World War II hastened

their entry into this field.

The first cooperative refineries were built by CCA, now

Farmland Industries, which began operating a 3,000-barrel-per-calendar-day (b/cd) plant in January 1940 and Indiana Farm Bureau

Cooperative Association, whose 2,500 b/cd plant started operating

in March 1940. CCA encountered numerous problems in raising

member capital, borrowing funds, getting a contractor, and obtaining

sufficient crude oil to operate the refinery.

Cooperatives bought five more refineries in 1943. By 1948, 14

regionals owned 20 small refineries with a total capacity of 144,500

b/cd. Of these, 13 were owned by individual regional cooperatives

and 7 by 3 interregionals. Transportation costs were high because

only four were located on water where they could access supplies

from ships or barges carrying crude oil. Only three were connected

with common-carrier crude oil and product pipelines.

Changes in product requirements and uses made it necessary

to modernize most refineries in the 1950s. Some plants were sold

6
Thefirst cooperative-owned refinery was built in 1940 by Consumers

Cooperative Association (now Farmland Industries, Inc.). A major

improvement in refining came with the addition of the catalytic cracker in the early 1960’s, the highest unit in this picture of CENEX’s

refinery at Laurel, MT
due to the high cost of modernization and their inefficiency. By 1969,

only nine cooperatives owned eight refineries.

In the 198Os, two large interregional refineries were lost to the

cooperative system. Energy Cooperative, Inc., East Chicago, IN,

went bankrupt. Texas City Refinery, Inc., Texas City, TX, was sold.

Farmland also closed small refineries at Scottsbluff, NE, and

Phillipsburg, KS. Many other small refineries have closed during the

past two decades and cooperative operations mirrored this trend.

Current Status of Plants and Operations

In 1993, the four remaining refineries in the cooperative system had a total capacity of 199,950 b/cd. These refineries processed

67 million barrels of crude oil, about 190,000 b/cd. They produced

about 37 million barrels of finished gasolines, 25 million barrels of

distillate fuel oils, and 1 million barrels of residual oil.

Cooperative refineries had a storage capacity of 8 million

barrels for refined products in 1993. Pipelines were most often used

for transportation, moving 74 percent of refined products from the

refineries. Highway transports hauled most of the remaining volume.

Eighty-eight percent of all gasolines, 94 percent of distillate

fuels, and 95 percent of propane production from cooperative refineries went to the wholesale petroleum operations of regional cooperatives. The rest was mainly solid products sold outside the cooperative

system (table 2).

Table 2-Refinery sales or transfers by product and type of product

recipient, 1993 and 1982

Product recipient

Product Cooperatives Other Buyers

1993 1982 1993 1982

Percent

Motor gasoline

Distillate fuel and kerosene

Residual fuel oil

Propane or LP gas

Lubricating oil

Solid products (asphalt,

coke. and others)

88.4 76.1 11.6 23.9

94.4 87.3 5.6 12.7

2.0 100.0 98.0

94.9 84.8 5.1 15.2

65.6 34.4

100.0 100.0

8
Wholesaling

Early Developments

In the 1920s many local retailing cooperatives had difficulty getting a dependable source of supply for refined fuels and

good-quality lubricating oils. So, they formed regional cooperatives

to pool their purchasing power.

The first wholesale cooperative to handle petroleum was

Farmers Union State Exchange, Omaha, NE. It began buying lubricating oil and grease in 1914 and refined fuels in 1924. Seven others

began handling petroleum during 1926-29 and 16 more started by

1939. In the 1930s several regional cooperatives formed National

Cooperatives, Inc., Chicago, to negotiate a contract with a refiner

for a year’s supply of fuels. Three regionals pooled their supply

requirements under a master contract through United Cooperatives,

Inc., Alliance, OH. Both fuel operations were discontinued a few

years later.

In the early years, wholesale cooperatives purchased fuels

from other oil companies under contract on a brokerage or commission basis. Later, they purchased, stored, and distributed fuels, lubricating oils, and greases at prevailing market prices like other oil jobbers. Still later, several acquired refineries and storage terminals.

Most did not take all the fuel their plants produced, but developed

exchanges with other companies to reduce transportation costs. Some

regional cooperatives also purchased part of their needs from other

companies that were better located to serve some affiliated local

cooperatives. Also, some smaller wholesale cooperatives purchased

petroleum products from larger ones.

Many local petroleum cooperatives have merged with grain

marketing associations in the Midwest and small farm supply cooperatives with large ones in other areas. In the past 30 years, many

regional cooperatives handling petroleum products have merged:

l Grange Cooperative Wholesale, Spokane, WA; Utah

Cooperative Association, Salt Lake City; Pacific Supply Cooperative,

Portland, OR; and Western Farmers Association, Seattle, WA, merged

and became CENEX, Inver Grove Heights, MN.

l Central Cooperative Wholesale, Superior, WI, merged into

Midland Cooperatives, Inc., Minneapolis, MN. Midland subsequently

merged with Land O’Lakes, Inc., Minneapolis, MN. In a joint venture,

CENEX/Land O’Lakes Ag Services now has CENEX supplying

petroleum products to Land O’Lakes locals.

9
l Farm Bureau Service Company, Des Moines, IA; Wisconsin

Farmco Service Cooperative, Madison, WI; and Illinois Farm Supply

Company, Bloomington, merged to become FS Services, Inc.,

Bloomington, IL. Later, FS and Illinois Grain Corp. merged to form

GROWMARK, Inc.

l Consumers Cooperative Association, Amarillo, TX; Farm

Bureau Service Company of Missouri, Jefferson City; and Minnesota

Farm Bureau Service Company, St. Paul, merged and became

Farmland Industries, Kansas City, MO.

l Cooperative GLF Exchange, Ithaca, NY; Eastern States

Farmers Exchange, West Springfield, MA; and Pennsylvania Farm

Bureau Cooperative Association, Harrisburg, merged to become

Agway, Inc., Syracuse, NY.

l Central Carolina Farmers, Raleigh, NC, merged with FCX,

NC. Later, FCX went out of business. Some operations were absorbed

by Southern States Cooperative, Richmond, VA, and Gold Kist Inc.,

Atlanta, GA.

l MFC Services, Madison, MS, and Delta Purchasing

Federation, Greenwood, MS, merged with Southern Farmers, Little

Rock, AR, and became SF Services, Little Rock.

l Landmark, Inc., Columbus, OH, merged with Ohio Farmers

and became Countrymark, Inc. Later, Countrymark, Inc. and Indiana

Farm Bureau Cooperative Association, Indianapolis, IN, merged and

became Countrymark Cooperative, Inc., Indianapolis.

Current Status

By 1993, 14 regional cooperatives were providing wholesale

petroleum products and services for locals (table 3). Wholesale

petroleum sales of regional cooperatives in 1993 were about $3.8

billion. They provided about 87 percent of the petroleum products

sold by local or regional farmer cooperatives. Some wholesale cooperatives serve one State while the trade areas of the multi- State

cooperatives overlap, especially in the Corn Belt, Northern Plains,

and Lake States.

Wholesale cooperatives supplied 4.3 billion gallons of liquid fuels to cooperative and noncooperative outlets in 1993. They

distributed 31 percent of their gasolines and 11 percent of their distillate fuels to private dealers and public institutions (table 4). They

also distributed about 28 million gallons of lubricating oil, 12,000

tons of grease, and 1 billion gallons of propane, primarily to cooperative outlets.

10
Table 3-Regional and interregional petroleum cooperatives’ structure

and type of operations, 1993

Crude oil

Operations Refining production

Cooperative and Headquarters

FEDERATED COOPERATIVES:

CENEX, Inver Grove Heights, MNiJ

Countrymark Cooperative, Inc., Indianapolis, IN2

Delta Purchasing Federation, Greenwood, MS2

Farmland Industries, Kansas City, MO2

GROWMARK, Inc., Bloomington, ILi,2

SF Services, Little Rock, AR2

South Dakota Wheat Growers, Aberdeen, SD

Tennessee Farmers Cooperative, LaVergne, TN2

Waterloo Service Company, Waterloo, IA

CENTRALIZED COOPERATIVES:

Agway Inc., Syracuse, NY2

Maine Potato Growers, Presque Isle, ME2

MFA Oil Company, Columbia, MO’

MIXED COOPERATIVES:

Farmers Petroleum Cooperative, Lansing, MI2

Southern States Cooperative, Richmond, VA2

INTERREGIONAL COOPERATIVES:

National Co-op. Refinery Assn., McPherson, KS

Universal Cooperatives, Inc., Minneapolis, MN

. .

.

- l

. .

- 0

- 0

- l

- 0

- l

. .

. .

. .

. .

. .

- .

- 0

. .

. -

--

* -

- l

- -

- -

- -

- -

- -

- -

- 0

--

--

l -

--

. .

0 -

--

--

- .

--

--

--

--

--

--

- .

- -

- -

l -

--

* Cooperative involved in this activity.

- Cooperative not involved in this activity.

I Members of National Cooperative Refinery Association: CENEX, GROWMARK,

and MFA Oil.

2 Members of Universal Cooperatives, Inc.: Agway, Alabama Farmers, CENEX, Countrymark

Cooperative, Inc., Delta Purchasing Federation, Farmers Petroleum Cooperative, Farmland

Industries, Gold Kist, GROWMARK, Maine Potato Growers, SF Services, Southern States

Cooperative, and Tennessee Farmers Cooperative.

11
Table 4-Quantity of petroleum products sold or transferred by cooperative wholesalers to cooperative and noncooperative outlets

Petroleum product

Total Type of outlet

deliveries Cooperative Noncooperative

1,000 gullons Percent

Gasolines:

Unleaded and leaded gasolines 2,135,330 68 32

Ethanol blended gasoline 154,025 88 12

Ethanol (for blending) 35,826 91 9

- -

Total gasolines (ex. ethanol): 2,289,355 69 31

Distillate fuels:

Premium diesel fuel

No. 2 diesel fuel

Home heating oil

Total distillate fuels:

672,948 97 3

761,445 86 14

573,078 83 17

- -

2,007,471 89 11

Other fuel oils and residual oil 277,581 1 99

Kerosene 48,259 83 17

Propane 1,075,600 98 2

Lubricating oil 28,173 95 5

Grease

Tons

11,979 76 24

Facilities and Operating Practices

Operations of ‘regional cooperatives in wholesale petroleum

distribution depended heavily on highway transports to haul refined

fuels to local bulk plants. They operated 460 highway transports for

liquid fuels and 221 for propane. In owned or leased transports,

regional cooperatives delivered 23 percent of the volume of motor

gasolines, 33 percent of the distillate fuels, and 44 percent of the

propane to their final outlets. The average highway transport traveled 45,000 miles delivering liquid fuels to cooperative outlets.

Cooperatives prepared for seasonal demands on their wholesale petroleum distribution systems by operating storage terminals

for motor fuels for heavy farming seasons and home heating oil for

winter. Some terminals were operated at refineries; others were on

12
pipelines or along rivers. Regional cooperatives operated 26 terminals

for storage and distribution of liquid fuels and 5 terminals for propane.

Motor gasoline storage of 116 million gallons would provide an

1 g-day supply for cooperative wholesale operations. Distillate storage of 180 million gallons would provide a 28-day supply.

Most wholesale petroleum cooperatives now handle several

major types of farm supplies and departmentalize their operations.

Many also have large farm product marketing programs. Most declare

patronage refunds at one rate on total business done with the cooperative. Some have special refund rates for total farm supply or total

petroleum purchases. A few declare separate refunds on individual

petroleum product purchases.

Retailing

Early Developments

The first petroleum products that farmer cooperatives handled were kerosene or “coal oil,” lubricating oil, harness oil, and axle

grease. When tractors were introduced, local bulk plants began to

stock liquid fuels that farmers could pick up in barrels. Soon after,

cooperatives began delivering fuel in tank trucks.

Cooperative distribution began in the Midwest. The first oil

cooperative was organized in 1921 at Cottonwood, MN. Such activity soon spread, reaching the East by the late 1930s.

Cooperatives began purchasing petroleum fuels primarily to

obtain substantial savings for members. At the time, gross margins

often were 6 to 9 cents a gallon, or 30 to 40 percent of sales. Improved

service was an important cooperative goal, especially to small farms

some distance from bulk plants. Cooperatives also found bulk distribution to be a good sideline to their grain marketing operations,

especially during slack marketing seasons.

Current Status

In 1993, 7 regional and 2,500 local farmer cooperatives were

distributing petroleum products to farmers. Regional cooperatives

had retail petroleum sales of $1.2 billion while locals had sales of

$3.3 billion. At the retail level, cooperatives sold more than 3.4 billion gallons of refined fuels, 1 billion gallons of propane, 27 million

gallons of lubricating oil, and 9,000 tons of grease. Of the locals that

sold petroleum products, about 90 percent delivered fuels to farms.

The Corn Belt, Lake States, Mountain and Pacific, and

13
Cooperatives were innovators in bulk delivery of petroleum to their

farmer members all across the country, beginning in the 1930’s.
Examples were in Winamac, IN (top left); Lansing, MI (bottom left);

Caldwell, ID (top right): and Lebanon, MO (bottom right).
Northern Plains were by far the most important regions in terms of

total petroleum products delivered by regional cooperatives (table

5). These regions are also most important in terms of total agricultural

demand for petroleum products. Comparing 1993 with 1982, there

have been some shifts in regional fuel distribution. Distribution of

both propane and lubricating oil in the Lake States has increased 10

percent, but distribution of all fuels declined somewhat in the Corn

Belt, Northern Plains, Appalachian and Southeast, and Delta States

and Southern Plains. The largest increase in liquid fuels distribution

was in the Mountain and Pacific regions. Motor gasoline was up 10

percent and distillate fuels up 7 percent.

Cooperatives have served farmers well, often being the only

source of delivered petroleum products. Cooperatives’ share of

petroleum sold for use in farm production increased from 14 percent

in 1942 to 41 percent in 1993, continuing the long-term growth trend

in the important role of cooperatives in providing fuels to U.S. farmers. Cooperatives sold an estimated 46 percent of total gasoline purchases by farmers for use in farm production in 1993. Cooperatives

provided 37 percent of total diesel fuel used for farm production and

49 percent of propane.

Table S-Distribution of cooperative wholesale petroleum deliveries

by region, 1993 and 1982

Region’

Motor gasoline Distillate fuels Propane Lubricating oil

1993 1982 1993 1982 1993 1982 1993 1982

Percent

Northeast 7.4 11.7 20.0 18.0 9.5 5.3 13.4 17.4

Lake States 18.6 16.9 18.1 16.1 31.3 19.2 23.7 12.4

Corn Belt 28.2 30.0 21.6 28.8 30.6 37.6 18.3 17.1

Northern Plains 16.7 19.4 13.7 17.2 14.7 25.9 15.8 17.2

Appalachian and

Southeast 4.6 6.6 5.7 6.6 3.8 4.1 3.6 4.7

Delta States and

Southern Plains 4.4 6.0 6.5 5.9 2.4 3.1 7.2 24.1

Mountain and

Pacific 20.1 9.4 14.4 7.5 7.7 4.9 18.0 7.0

INortheast: ME, NH, VT, NY, MA, RI, CT, PA, NJ, DE, MD, and DC. Lake States: MI,

WI, and MN. Corn Belt: OH, IN, IL, IA, and MO. Northern Plains: ND, SD, NE, and KS.

Appalachian: VA, WV, KY, TN, and NC. Southeast: SC, GA, AL, and FL. Delta States:

MS, LA, and AR. Southern Plains: OK and TX. Mountain: MT, ID, WY, CO, UT, NV,

AZ, and NM. Pacific: WA, OR, CA, HI, and AK.

16
Some of the more recent growth in cooperative market share

came from other distributors who abandoned rural markets. For

instance, in 354 rural communities, or more than 5 percent of ones

supplied by cooperatives, their outlets were the sole source of

petroleum products. These outlets sold an estimated 242 million gallons of liquid fuels, or more than 5 percent of their total volume.

Facilities and Operating Practices

Some cooperatives handle petroleum products exclusively

through customer-fill stations and card- or key-activated outlets.

Others may only have a bulk delivery truck that makes onfarm deliveries. Many of the farm supply or grain marketing local cooperatives

have petroleum sales in some form.

Cooperative retail facilities usually have a bulk tank area with

several large storage tanks for different fuels. These tanks can accept

transport truckloads from the wholesale supplier and are used to fill

bulk delivery trucks. In 1993, cooperatives operated 3,416 bulk plants

for the distribution of liquid fuels (table 6). In many cases, customerfill stations are operated in conjunction with bulk delivery facilities.

From a recent CS study (Chesnick) where more than 700

local cooperatives responded, it was found that 90 percent delivered

bulk petroleum products and 71 percent had a customer-fill station.

Bulk delivery trucks are usually owned by the local cooperative and

service personnel are employed on a salary or a salary-plus-commission or bonus basis. Some cooperatives own only the truck tanks

and employ service personnel on a commission basis. The driver

owns the truck chassis.

Most liquid fuel is distributed to farms in trucks carrying a

2,000- to 4,000-gallon load. Truck tanks have compartments for

individual fuels and are equipped with dual meters and mechanical

Table 6-Cooperative owned petroleum final outlets supplied by

regional cooperative wholesalers, 1993

Outlet

Refined Propane or

liquid fuels LP gas

Bulk delivery centers 3,416

Card- or key-activated facilities 1,761

Customer fill stations 1,642

Number

1,785

1,322

17
Cooperatives used almost 500 highway transports to deliverfuels

like this one at Farmers Cooperative Association, Red Cloud, NE.
Cooperative convenience stores with fuel stations, like this Ampride

at Concordia Farmers Cooperative, Concordia, MO, are becoming

increasingly common. Cooperatives also owned 1,600 customerfill

stations like this Agway Energy Products station at Cortland, NI:
unloading pumps. They usually unload into onfarm storage tanks

holding 250 to 1,000 gallons. Larger farm operations have the capacity to purchase truckloads and thereby cut fuel delivery costs.

Distribution of propane requires a duplicate set of storage

and delivery equipment. Cooperatives operated 1,785 bulk plants for

propane and 1,322 customer-fill stations (table 6).

Delivery routes are arranged to end near a bulk plant to minimize travel of empty trucks. Routes are sometimes planned by computer programs. Portable computers are used by delivery salesmen

for billing and maintenance of farm sales records. Also, in many

areas, delivery trucks are scheduled on the principle of degree days

for home heating oil and propane. Some routes operate on a “keep

full” basis. Once farmers establish a consumption level, periodic

refueling becomes routine and automatic.

Retail cooperatives generally sell petroleum products at competitive or going market prices in their communities. From profits, the

board may declare a refund based on the amount of business each

patron had with the cooperative. Some declare a rate as a percent of

total sales while others use a per-gallon rate for individual fuels and

lubricating oil.

Much of the petroleum sold to cooperative members is on a

credit-available basis within terms of the cooperative’s policy.

Seventy one percent of the cooperatives handling petroleum

also operate service stations (Chesnick). Many of them stock automotive repair supplies such as tires, batteries, and accessories. In 1993,

cooperatives operated 1,642 customer-fill stations selling gasoline and

other fuels and often offering oil changes, greasing, and washing.

Card- or key-activated outlets are becoming more widespread

and save on labor costs. Cooperatives had 1,761 of these outlets.

Customers can pump their own gas at any time and even fill their

own bulk tank trucks. The customer is billed through a credit card

account.

Related Supplies

Petroleum Equipment

Most early local cooperatives that sold

also sold or loaned 55gallon drums or barrels

petroleum products

to farmers for storing fuels. As farm operations became larger, cooperatives sold, loaned,

or rented 250-, 500-, and l,OOO-gallon farm tanks. Most tanks were

mounted on overhead stands. In the East, many were placed under20
ground. Eastern cooperatives usually loaned tanks to farmers while

cooperatives elsewhere sold them.

Wholesale cooperatives continue to sell an array of bulk storage tanks and pumping and metering equipment to local cooperatives or truck operators. Some wholesale cooperatives also provide

facility engineering services to locals for service stations, convenience stores, and bulk plants and supply credit or financial assistance to purchase them.

Tires, Batteries, and Related Services

Cooperatives frequently supplement their petroleum lines

with tires, batteries, and accessories (TBA) through service stations

or farm supply stores. Volume of these items has grown in many

cooperatives to where they are treated as a separate department of

the cooperatives’ supply operations. As new facilities are built, larger display areas for automotive supplies and equipment are often

included.

Most locals obtain their tires, batteries, and some accessories

through wholesale cooperatives. Many regionals, in turn, buy these

supplies from Universal Cooperatives, Inc., Minneapolis, MN, a procurement and manufacturing interregional owned by 25 member

regional cooperatives. In 1993, Universal’s TBA volume exceeded

$70 million.

On-farm tire service has grown with the TBA business. Fortyseven percent of the surveyed cooperatives (Chesnick) provide an

on-farm tire maintenance service using a mobile unit for tire repair,

changing tractor and equipment tires, and tuneup services.

Other cooperatives have extended their automotive operations into car care service centers. Twenty-two percent of the local

cooperatives operate car care centers with additional service bays

and employ a mechanic for general maintenance and some major

repairs. These centers provide numerous services such as wheel balancing and alignment, brake replacement, carburetor and minor motor

repairs, and State safety inspections. Also, about 5 percent of the

local cooperatives operated a franchise outlet that specialized in such

items as mufflers, brakes, tires, and auto wheel alignment.

Convenience stores with fuel stations were operated by 42

percent of the cooperatives. CENEX Convenience Stores is a cooperatively owned chain of about 300 stores. Many cooperative convenience stores are open 24 hours and provide more employment

opportunities than a customer fill station.

21
Challenges and Opportunities

Looking to the next millennium, petroleum cooperatives will

face numerous challenges and opportunities as changes continue in

their basic markets and ways of doing business. Some are unique to

the petroleum industry and cooperatives’ niche within it, some are

common to all agribusiness concerns serving the American farmer, and

others are endemic to the U.S. cooperative system.

For example, the industry was challenged by an

Environmental Protection Agency (EPA) requirement that refineries

produce low- sulfur diesel fuel for highway use by Oct. 1, 1993.

This required investment in expensive additional equipment, such as

a diesel hydrotreater. More than 34 percent of cooperative refinery production met this challenge and 51 percent of regional cooperative

diesel sales were low sulfur. By the end of 1993, most cooperative

refinery diesel sales were low sulfur.

The cooperative system, itself, is challenged by its farmermembers to sell ethanol-enhanced gasoline, a renewable resource

fuel. About 29 percent of gasoline sold by regional- or local- owned

petroleum outlets was probably ethanol or ethanol-enhanced. Ethanol

is primarily produced from corn, so cooperatives have turned

ethanol-enhanced gasoline sales into an opportunity to add value to

their farmer-members’ corn crop.

Challenges

With 187 refineries in the U.S. and many thousands of retail

service stations and bulk delivery outlets as competitors, petroleum

cooperatives face major challenges. Most of these cooperatives also

sell a variety of other farm supplies, so their petroleum sales may be

complementary to other farm supply sales and thus expose them to

competition from other farm supply distributors.

Specific challenges listed on a survey of regional cooperatives that sold petroleum (Eversull and Dunn) will be presented in

part in the following sections, ranked in order of importance by

respondents. First though, a short discussion of the competition of

local cooperatives can be assessed from a recent CS study (Chesnick).

More than 700 local cooperatives returned usable surveys on

their petroleum operations. At least 80 percent of locals’ supply of

fuels, lubricating oils, and grease, was provided by regional cooperatives. Major oil companies supplied about 4 percent, and independent jobbers about 6 percent. Each local cooperative had at least

22
16 retail competitor service stations in its marketing territory, half

representing major oil companies and half independents.

Legislative and Regulatory Concerns

Survey respondents said the major challenge facing petroleu

cooperatives was the growing legislative and regulatory burden. 

regional cooperatives have at least a legislative and regulatory affairs

person while refineries often have an entire department to keep abreast

and comply with new laws and regulations. Since a 1988 study,

petroleum retailers have instituted measures to control pump vapor

pressure and continued efforts to replace leaking underground storage tanks. More recently, the sulfur content of diesel fuel has been

lowered but the regional oxygen content of gas has come into question.

Public concerns over the quality and safety of the water supply, air, and other components of the environment will continue to

affect the production, storage, transportation, and use of petroleum

products. The net results affecting the industry are quite simple:

decreased total use of petroleum and petrochemical-based products

and more efficient and careful use of existing supplies.

For cooperatives involved in various aspects of the petroleum

industry, the impact of these changes will take three general forms:

(1) changes in the mix of products produced and raw materials used

to produce them; (2) capital investments required to bring the physical plant and operating practices up to regulated specifications; and

(3) changes in the agronomic and operating practices of petroleum

product buyers.

Decreasing Number of Farms

The trend will probably continue toward an increasingly

bimodal distribution of farms-marked by an increase in the number

of very large and small farms while the number of medium- size

operations declines steeply. Farm numbers have decreased by about

300,000 in the past decade to about 2 million. In some production

sectors-red meats and poultry-independent producers will face

especially intense competition from vertically integrated firms striving to dominate the market from farm to consumer. Surviving producers will be more technically sophisticated. They will be more

focused on their individual profit and less on activities or groups not

having a direct and immediate impact on their profitability.

Cooperatives will be challenged to gain and hold the patronage and loyalty of these surviving farmers. New programs and

23
approaches will be required that are tailored to needs of individual

patrons.

A reduction in farms alone means fewer customers and probably more intense competition for their accounts. Production agriculture is also changing, however, requiring fewer gallons of fuel.

Fuel requirements will continue to fall as the products and methods

of agriculture production change due in part to new crops developed

from genetic engineering and reduced-use agronomic practices.

New commercial crops and different agronomic techniques

will alter the location of production, the mix of supplies required,

and the demographics of the farming sector.

Increasing Distribution Costs

Declining rural populations and fewer and larger farms have

increased distribution costs due to longer distances traveled for the

same sales volume. Environmental and safety concerns also have

increased distribution costs. Many underground storage tanks have

been replaced. The pump-to-vehicle tank delivery system has been

upgraded to lower vapor emissions. Cooperatives have had to adopt

new technology or adapt to changing marketing strategies. About 25

percent of their terminal distribution facilities have been consolidated or closed. More efficient fuel deliveries allow more shipments

with fully loaded trucks.

Rural Transportation Infrastructure

The deteriorating rural transportation system is of great significance to U.S. farm supply and marketing cooperative activities.

The extensive transportation and distribution system of cooperatives depends on a well-maintained rural road, bridge, and transportation infrastructure that provides access to all areas. To minimize costs, larger delivery vehicles are required to transport supplies

such as petroleum. Cooperatives must work with other involved public and private parties to ensure that improvement of the rural transportation infrastructure receives the appropriate attention.

Servicing Accounts

With fewer farms and farmers, petroleum cooperatives are

increasingly competing for the same customers. Often, this competitor is another cooperative. Another CS study (Chesnick) found

that local petroleum cooperatives, on average, have about two other

cooperative retail service stations in their marketing territories and

24
vices increases cooperatives’ cost in the petroleum sector.

Competition, technology, and changing farm demographics

pressures will force cooperatives at all levels to restructure in search

of greater efficiency, more responsiveness, and improved ability to

compete. Serious efforts must be made to eliminate duplication of

efforts and investments and to reduce overlap at all levels of the cooperative system.

Rural Nonfarm Markets

Respondents said retail pump sales to highway traffic and

rural nonfarm markets have the greatest potential for increasing cooperative sales. Faced with falling demand for fuels for farm production,

cooperatives need to expand their markets. They already have in

place the infrastructure to deliver and sell petroleum products to rural

America.

Unless cooperatives expand their potential customer base,

more of their capacity will have to be idled in the future. Cooperatives

could then spread their fixed costs over larger sales. Expanding their

customer base addresses the need to compensate for high-cost,

low-volume accounts.

Convenience Stores With Fuel Stations

Drastic reductions in availability of goods and services due to

business closure have hit many rural areas. In some communities,

the cooperative may operate the only service station. These commu25
nities may also be too small to have a grocery store. A convenience

store with a fuel station may be an answer.

Although they offer a more limited line of food items than 

grocery store, convenience stores are a reasonable substitute when

the nearest grocery store may be many miles away. Many convenience stores operate 24 hours and offer more employment opportunities than a self-service station. This is another way cooperatives

can expand their petroleum sales to rural, nonfarm markets.

Card- or Key-Activated Outlets

Cooperatives were leaders in card- or key-activated petroleum

outlets that allowed farmers 24-hour access. Several large cooperatives began using this concept about a decade ago. The petroleum

industry has now widely adopted the automated- billing process

which features use of a credit or debit card. Seventy one percent of the

local cooperatives are using this service (Chesnick). The change,

however, has been accompanied by higher costs. Pumps used in these

systems cost more because of technology involved to process automated billing. Cooperatives also pay a small transaction fee on credit card sales. Some smaller cooperative outlets may not have these

updated systems because of these additional costs.

U.S. cooperatives have served the petroleum needs of farmers and rural America for many years. By being innovative, flexible,

and dedicated to serving the needs of their patron base, cooperatives

will play a major role in rural petroleum markets for years to come.

Bibliography

Bailey, John M., Petroleum Operations of Farmer Cooperatives,

1979, U.S. Department of Agriculture, Agricultural Cooperative

Service, Research Report 9, June 1981.

Chesnick, David S., Local Petroleum Cooperatives, 1993, U.S.

Department of Agriculture, Rural Business and Cooperative

Development Service, Cooperative Services, Research Report

149, August 1996.

Eversull, E. Eldon, and John R. Dunn, Petroleum Cooperatives, 1993,

U.S. Department of Agriculture, Rural Business and Cooperative

Development Service, Cooperative Services, Research Report

143, July 1995.

26 sYJ S. GOVERNMENT PRINTING OFFICE: 1996-O-717-966
Authors/E. Eldon Eversull and John R. Dunn

(Historical information is drawn heavily from publications by

J. Warren Mather, formerly with Agricultural Cooperative Service,

now deceased.)
U.S. Department of Agriculture

Rural Business/Cooperative Service

Ag Box 3250

Washington, D.C. 20250-3250

Rural Business/Cooperative Service (FIBS) provides research, management, and educational assistance to cooperatives to strengthen the economic position of farmers and

other rural residents. It works directly with cooperative leaders and Federal and State

agencies to improve organization, leadership, and operation of cooperatives and to

give guidance to further development.

The cooperative segment of RBS (1) helps farmers and other rural residents develop

cooperatives to obtain supplies and services at lower cost and to get better prices for

products they sell; (2) advises rural residents on developing existing resources through

cooperative action to enhance rural living; (3) helps cooperatives improve services and

operating efficiency; (4) informs members, directors, employees, and the public on how

cooperatives work and benefit their members and their communities; and (5) encourages international cooperative programs. RBS also publishes research and educational materials and issues Farmer Cooperatives magazine.

The United States Department of Agriculture (USDA) prohibits discrimination in its programs on the basis of race, color, national origin, sex, religion, age, disability, political

beliefs and marital or familial status. (Not all prohibited bases apply to all programs.)

Persons with disabilities who require alternative means for communication of program

information (Braille, large print, audiotape, etc.) should contact the USDA Office of

Communications at (202) 720-2791.

To file a complaint, write the Secretary of Agriculture, U.S. Department of Agriculture,

Washington, D.C. 20250, or call (202) 720-7327 (voice) or (202) 720-l 127 (TDD).

USDA is an equal employment opportunity employer.