Rural

COOPERA COOPERATIVES

USDA / Rural Development July/August 2004

SPECIAL SECTION

Co-ops and

Biofuels

page 10
2 July/August 2004 / Rural Cooperatives

It may not have quite the ring of the

“Put a Tiger in Your Tank” advertising

campaign from the 1960s, but for those

of us paying well above $2 a gallon for

gasoline this summer, the idea of

putting corn kernels or soybeans in our

fuel tanks may have some new-found

appeal. As of this writing in early July,

gas prices have subsided a bit, but with

domestic and worldwide petroleum

reserves ever dwindling, it seems we are

climbing an increasingly steep petrolprice stairway — one with no end. 

While farmers are hit even harder

than most Americans by higher fuel

bills, at least some of them are smiling:

those corn/soybean farmers who have

built ethanol and soydiesel processing

plants. They are currently earning

good returns by transforming their

crops into a value-added product that is

simultaneously beginning to help ease

our nation’s dependence on foreign oil. 

We’ve devoted a large portion of

this issue to relating the experiences of

several of these new processing co-ops.

Articles have also been contributed by

some farm supply co-ops which are

promoting the sale of ethanol or soydiesel. Farmer and utility cooperatives

are also delving into production and

use of other renewable fuels and energy sources, such as methane recovery,

thermal depolymerization, wind and

solar power and other technologies.

In addition to farmers earning

money from biofuels, the increased

demand they create for corn and soybeans has helped to raise grain prices

for all farmers in their operating

regions. Better still, some towns, such

as Benson, Minn., credit an overall

revival in their economies to the opening of ethanol processing plants in their

vicinity. The co-op

there, Chippewa

Valley Ethanol,

has also been a

leader in promoting a

marketing

venture that is

selling ethanol

for a number of

co-ops. Some

observers say such

marketing ventures

are needed for producers to truly reap the benefits of a biofuel economy. 

Just because things are

going well now doesn’t mean

they will continue to. For a

cautionary tale, read the

account in this issue of what

happened to ethanol pioneer

Minnesota Corn Processors.

It’s a story others won’t want to

repeat. MCP was once the

nation’s leading producer of

ethanol. Many factors contributed to its demise and the

eventual decision to sell its

operations. Author Anthony

Crooks says a major reason

was a desire/need by older

members to sell out to ADM

because they couldn’t find

other producers to buy their

co-op/LLC stock. That’s a

problem many co-ops are

wrestling with in one way or

another. 

Some Minnesota legislators — who were strongly supportive of the coop and the $33 million

in state subsidies it

had received while

farmer owned —

feel the taxpayers

were cheated

when the operation was sold.

One legislator

has even

demanded that

ADM return those

taxpayer dollars. 

As well as the

industry is doing at present, it obviously is still

heavily dependent on such

incentives, both to help build

plants and to boost prices for

ethanol and biodiesel. If producerowned co-ops and LLCs wind up

being absorbed by industry giants,

it could spell real trouble for the

continuation of such incentives.

A board member of one ethanol

co-op told us that farmers are very

cognizant what happened to MCP

and they don’t believe they will get

caught in the same trap. If so, and

if the technology and economics of

biofuel production continue on

anything like their current trajectory, the Corn Belt may someday

also become the nation’s Fuel Belt

— or at least its reserve tank. 

Keeping the industry largely

farmer owned, with the majority

of the benefits distributed in

rural areas that produce and

process the grain, may be the

best self-help rural development

program to come down the pike

in many years. 

Dan Campbell, Editor

COMMENTARY

Put a soybean in your tank

Graphic by Stephen Thompson
Rural Cooperatives / July/August 2004 3

Rural COOPERATIVES (1088-8845) is published

bimonthly by Rural Business–Cooperative Service,

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Ave. SW, Stop 0705, Washington, DC. 20250-0705.

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Mention in Rural COOPERATIVES of company and

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Unless otherwise stated, contents of this publication

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prohibits discrimination in all its programs and 

activities on the basis of race, color, national origin,

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orientation, and marital or family status. (Not all 

prohibited bases apply to all programs). Persons 

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To file a complaint of discrimination, write USDA,

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Building, 14th and Independence Avenue, SW,

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

(voice or TDD). USDA is an equal opportunity

provider and employer.

Ann Veneman, Secretary of Agriculture

Gilbert Gonzalez, Acting Under Secretary,

USDA Rural Development

Peter Thomas, Acting Administrator, 

Rural Business-Cooperative Service

Pandor Hadjy, Acting Deputy Administrator,

USDA Rural Business-Cooperative Service

Dan Campbell, Editor

Vision Integrated Marketing/KOTA, Design

Have a cooperative-related question?

Call (202) 720-6483, or

Fax (202) 720-4641, Information Director,

This publication was printed with vegetable oil-based ink.

Rural COOPERA COOPERATIVES

July/August 2004 Volume 71 Number 3

On the Cover:

Ethanol fuel pumps aren’t really popping up in Midwest cornfields, but it almost

seems like it. Seventy-five ethanol plants are now in operation, and as many as

100 more biofuel plants are at some stage of planning or construction. Why the

vintage fuel pump? “It symbolizes the combination of old-fashioned work values

of rural America with the advancing technology of biofuels,” says assistant editor/graphic artist Stephen Thompson. And those old pumps had class! A special

biofuels section begins on page 10.

p. 4

Special Section

p. 10

p. 22

FEATURES

4 Co-ops can play role for members seeking

trade adjustment assistance

By Alan Borst

38 Compensating co-op directors

USDA study reveals wide range of pay plans 

By Bruce Reynolds

Special Section > Co-ops and Biofuels

DEPARTMENTS

2 COMMENTARY

6 VALUE-ADDED CORNER: AMAZING GRAINS!

42 NEWSLINE

48 NEW CO-OP PUBLICATIONS 

10 Fueling a rural revival

Ethanol co-op supports farmer

income while providing lift to 

community

By Dan Campbell

14 Great Expectations

Ethanol is hot, but what is the longterm outlook for biofuel?

By Stephen Thompson

18 Balancing act

Risk-hedging strategy big part of Iowa

co-op's success

By Dan Campbell

21 Community investments 

help launch plant 

By Stephen Thompson 

22 Lost Horizon

Membership “horizon”problem 

preceded demise of MCP 

By Anthony Crooks

26 MFA Oil committed to development

and marketing of renewable fuels 

By Diane Searcy

28 Buying biodiesel ‘off the rack’

CHS investing in new injection technology to streamline biodiesel blending process

By Steve Richter

30 The right thing

GROWMARK's Kelley says time is

right for renewable fuels to gain larger share of market

By Ann Hastings 

32 Hard lessons

Tri-State Ethanol struggling to overcome difficult start 

By Stephen Thompson

34 USDA grants support 

home-grown fuels
4 July/August 2004 / Rural Cooperatives

Co-ops can play role for members

seeking trade adjustment assistance 

Alan Borst, Ag Economist

USDA Rural Development

e-mail: alan.borst@usda.gov

ne service that many

cooperatives have long

provided to eligible

members is the application and delivery of

government benefits. For example,

cooperatives have been obtaining

marketing assistance loans and loan

deficiency payments on behalf of

members for decades through the

Cooperative Marketing Agency program of the U.S. Department of

Agriculture’s (USDA) Farm Service

Agency. 

Members benefit from saving

time and effort in not having to

apply for benefits they receive, while

the cooperative can more efficiently

process and submit the applications

with much of the necessary information having already been gathered

for other purposes. Another potential opportunity of this kind has

opened up for some cooperatives

with members who have been economically hurt by import

competition.

The Trade Act of 2002 established a new program, Trade

Adjustment Assistance (TAA) for Farmers, for fiscal years

2003-2007. This program is administered by USDA’s

Foreign Agricultural Service (FAS). TAA provides technical

assistance and cash benefits to eligible producers of raw

products that have suffered reduced prices due to imports. 

TAA has two main requirements that applicants must

meet in order to be eligible. First, the most recent marketing

year’s price must be less than 80 percent of the average of

the five preceding marketing years. Second, this price

decline must be shown to be due to an increase in imports.

Be aware that once a petition is approved, all producers in

the region for which the petition was filed are eligible for

TAA if they meet certain eligibility

requirements. If a producer did not

produce, could not demonstrate a

decline in net farm or fishing income,

has received TAA payments equal to

$10,000, or has received countercyclical payments equal to $65,000,

they would be ineligible for TAA payments.

Co-ops qualified to apply

Growers must file a petition in

groups of three or more, or through

an authorized representative. A marketing cooperative would qualify as

such a representative. Prospective

grower groups or their representatives

may submit TAA petitions between

Aug. 15, 2004, and Jan. 31, 2005.

Only one petition may be submitted

per marketing year. The TAA petition

form may be found on the Internet at:

www.fas.usda.gov/itp/taa/fas0930.pdf. 

The petition form is only two

pages long and requires only basic

information and price data. Any group

of growers is likely to be able to fill it

out with little difficulty. In addition,

FAS has personnel who will help growers or their representatives prepare their petitions. However, most petitioners to

date have been commodity associations.

There are a several important decisions that any growers

or their representatives must make in preparing a petition:

• The petitioner must be as specific as possible in identifying the like or directly competitive imported product

that is being claimed as contributing importantly to the

commodity’s price decline. The inclusion or exclusion

of a particular class of product may make the difference

between the certification or denial of a petition.

• The petitioner must carefully consider whether the certification is to cover a commodity produced nationally

or in a state. Again, this may influence the chances that

O

Facing increasing pressure from imports, Maine

wild blueberry growers petitioned for assistance

under USDA’s Trade Adjustments Assistance 

program, and ultimately collected 2.8 cents per

pound for the period 1997-2001. Photos courtesy

Wild Blueberry Growers Association of North America
Rural Cooperatives / July/August 2004 5

a petition will be certified and the size of the potential

payment rate for certified farmers. Price may have

declined by the required 20 percent in one state, but

not nationally, or vice versa. The greater the documented decline in grower price in the petitioned year from

the average of the previous five marketing years, the

higher the potential cash benefit for the certified farmers. FAS will ultimately select the best available price

series, which may be different from the one submitted,

but selecting the impacted area, whether it is a state or

the nation as a whole, with the greatest price decline is

in the interest of the petitioner.

• The petitioner needs to be careful in specifying the

marketing year for the product. The marketing year will

influence the boundaries of the price series, and thus

the chances of the petition’s success. The period identified in the petition as the marketing year must be commercially justifiable, especially if it is different from that

identified by the USDA’s Agricultural Marketing Service

(AMS). FAS may insist on using the AMS marketing

year if it is the logical choice. A marketing year may be

a varying length depending upon the commodity.

25 assistance requests approved by FAS in ‘03

FAS’ Import Policies and Programs Division receives and

processes the TAA petitions, reviews for basic eligibility, and

provides guidance to the petitioner, ensuring that the petition meets the minimum tests. In 2003, the first year of the

program, 47 petitioners submitted petitions to the Division.

Twentyfive of these

petitions were

accepted by the

Division after confirming

that the prospective growers’

prices had declined by the required

20 percent, while 22 were not accepted. 

A notice for each accepted petition is

published in the Federal Register. For the first

year, program participants have included Maine wild

blueberry producers, Alaska and Washington salmon

fishermen, North Carolina, South Carolina, Georgia,

Alabama, Texas and Arizona shrimp farmers and shrimp

fishermen, Florida lychee growers and catfish farmers in 18

states.

Last October, a trade association with substantial cooperative membership submitted a petition for adjustment assistance with the intention of coordinating the producer petition of its members. However, the petition was not accepted

because it failed to meet the basic eligibility criteria.

Once the petition has been found to be in order, the next

step is for the USDA’s Economic Research Service (ERS) to

study the case. ERS verifies the price information and analyzes all economic and market factors that may have contributed to the price decline. ERS then presents FAS with its

findings, which are then reviewed by an interagency committee of senior economists. 

This committee then recommends to the FAS administrator that the petition be certified or denied. A notice of

certification or denial for each petition is published in the

Federal Register. The period of time between acceptance of

a petition and its certification or denial can be no more

than 40 days.

Petitioners have responded to import competition in two

ways that have caused rejection of their petition. In some

cases, growers recognize that a surge of imports has

occurred and reduce their production accordingly, thus better balancing supply and demand and preventing a price

plunge. This has the effect of preventing the required 20-

percent price decline. 

continued on page 46
6 July/August 2004 / Rural Cooperatives

By William W. Barr

Cooperative Development Specialist

USDA-Rural Development, Montana

ook before you leap. But

not too long, because he

who hesitates is lost. 

Those two somewhat

contradictory adages

have special meaning to anyone who

has ever launched a new business venture. Make sure you test the waters

before you jump in, we are advised on

one hand. But wait too long for an

opportunity in a business market as

dynamic as in the United Sates, and

you may see opportunity snatched

away by someone who was more

aggressive and/or better capitalized.

The trick, of course, is to find the

right balance of caution and courage. 

The development of Amazing

Grains Grower Cooperative represents

such an effort. Its producer members

began the journey as a search for a

market for processed, millable seed —

a market that would provide the most

value-added options for the lowest

producer investment. Helping them

along on this journey was a ValueAdded Producer Grant from USDA

Rural Development, which provided

working capital for a number of the

co-op’s efforts. 

Amazing Grains is a grower-owned

cooperative that produces, processes,

packages, markets and distributes a

gluten-free flour made from Indian

rice grass. The cooperative also supplies state-certified native grass seed

for private

and federal

land reclamation

projects.

In addition to

the USDA

funding, a wide

range of public and

private partners contributed technical and financial assistance to guide this group of growers. 

Dietary staple for Native Americans 

Indian rice grass is a native grass

that served as a dietary staple of Native

Americans for many centuries before

the introduction of maize. The grass

was produced in limited quantity in

Montana for land reclamation projects,

but volatile price swings and an unreliable market kept the producer base

small. 

In the 1980s, Dr. David Sands, a

research scientist and professor in the

Montana State University Department

of Agriculture in Bozeman, determined

that

Indian rice

grass had

valueadded

potential for

producers.

The flour of

the rice grass is

gluten free and —

when used to make a variety of bakery

products — it has fine flavor and is

high in fiber and protein. 

Alternative gluten-free flours —

such as those made from rice, bean,

potato and corn — do not exhibit

these combined characteristics.

Improved nutrition and better tasting,

gluten-free products are marketed

under the co-op’s trade name:

MontinaTM. These products are of

interest to those who suffer from

gluten intolerance, or Celiac disease. 

Celiac disease is a genetic autoimmune disorder which can result in

overwhelming fatigue, diarrhea, vomiting, malnutrition and eventual death.

While there is no cure, removal of

foods from the diet that contain gluten

can successfully control the effects. 

The challenge for producers of

Indian rice grass was to develop a

solid, reliable commodity-producer

base to process high-quality seed into a

nutritious, good tasting, quality product which is reliably gluten free. 

The assured gluten-free reliability is

critical to those inflicted with Celiac,

for the market is very “purity conscious.” The co-op is concentrating 

V ALUE-ADDED CORNER

L

Amazing Grains!

Montana grain growers use VAPG funds 

from USDA to develop gluten-free flour 

The trick, of course,

is to find the right

balance of caution

and courage.
Rural Cooperatives / July/August 2004 7

on the European and North American

markets. 

Indian rice grass is a “bunch grass,”

used for wild-land range forage. It

grows throughout the intermountain

West, is drought resistant and survives

well in cold weather. For Indian rice

grass to succeed as a reclamation seed

and as a base for gluten-free flour, it

has to be price stable. It must be available in sufficient quantities to withstand competition from alternative

species and cannot be priced prohibitively high. Processing must produce a

reliable, consistent gluten-free product. 

Crop scarce at first 

At the start of this project, there

was a scarcity of cultivated Indian rice

grass and producers willing, and able,

to produce it. Project development was

initiated under the guidance of the

Montana State University (MSU)

research team, aided by a small

Indian rice grass producer team in

the Malta area of Montana. 

In 1997, the Montana

Department of Agriculture

provided a $10,000 Growth

Through Agriculture Grant to

the MSU research team and

the project leaders to investigate developing Indian rice

grass into a value-added food

product the emerging cooperative

could produce and market. 

In 1998, USDA’s Agricultural

Marketing Service, Federal State

Market Improvement Program

(FSMIP), awarded a grant of $95,000

to MSU to determine market potential

of Indian rice grass as a gluten-free,

perennial grain crop. Study results suggested that market potential was positive, especially domestically. Product

development research was conducted at

Southern Labs Inc., resulting in a

nutritional profile. 

MSU’s Central Agricultural

Research Station conducted an economic analysis of cultivation, flour

production and weed management

studies. In addition, studies were conducted addressing market penetration

and entry and development of a seed

crop, seed cleaning techniques and

requirements for a processing facility.

Dr. Duane Johnson, the Research

Leader at the MSU Agriculture

Research Center at Creston, demonstrated — through research and test

plots production — that Indian rice

grass could be grown as a cultivated

crop. He and Dr. Sands developed

guidelines for site preparation, planting, weed control and harvesting. A

mill for processing the seed was located and made available. 

Opportunity vs. risk 

During this period, there was widescale regional drought in the Malta

area. Indian rice grass production does

not reach full potential until two to

three years after planting, and cautious

producers were hesitant about starting

to grow a new crop, especially under

these conditions. 

While some growers saw the opportunity for added income, they also saw

substantial risk. During times of

drought and poor crop prices, convincing producers to take additional investment risk is difficult. 

Interested producers were unfamiliar

with how to start a new value-added

cooperative, how to manage the business to produce the value-added product and how to effectively market it.

Underestimating the amount of organizational work required for the cooperative project led to commodity production delays, as well as delays in the

establishment of cleaning and milling

facilities. The bridge between research

and practical commercialized business

operations appeared to be a long one. 

In spite of the initially discouraging start, there was a high level of

interest among producers with strong

desire to develop the project into a

commercial, cooperative business.

Some timely developments designed

to reduce the risks occurred in 1999

when the state legislature made

changes to the Montana Code covering legal incorporation of cooperatives. These changes clarified legal

and regulatory cooperative development issues. 

Another key development came

with a grant for a Lake County

Community Development

Corporation project in Ronan,

Mont. Called Mission Mountain

Market, a state Department of

Agriculture grant provided in

1999 assisted in the establishment of a commercial kitchen

facility and business incubator.

Other funding agencies also

contributed grants for the Lake

County project. 

Lake County received USDA

Rural Development funding for a

cooperative development specialist.

Working for Mission Mountain

Market, Jan Tusick has become a key

partner with the statewide center. The

potential producers of Indian rice grass

now had a technically proficient cooperative development specialist able to

work with them in their primary

planned area of production. 

Cooperative development legal

counsel was provided by Steve Noack

of the Gunhus Law Firm in North

Dakota. He was contracted to assist

with bylaw development and capitalization plans. 

The cooperative was legally incorporated in 2000 and its first organizational meeting was held in January

2001. 
8 July/August 2004 / Rural Cooperatives

“Producer champion” sought

Mission Mountain felt that a “producer champion” with credibility

among growers needed to be found to

assist Amazing Grains Grower

Cooperative — someone with business

experience other than just commodity

production. 

John Sheldon, who lived, farmed

and owned Crestin Seeds in Kalispell,

Mont., had over 20 years’ experience

producing Indian rice grass seed for

mine site reclamation projects and in

applying direct seeding systems. The

co-op was progressing towards its goal

of stepping forward from commodity

production to value-added processing

and marketing. Using a 1999 USDA

Risk Management Grant, a series of

membership and production education

drives were held. In 2001, the co-op

held its first stock offering.

In 2001, the Montana Board of

Research and Commercialization

Technology awarded a $205,000 grant

to Montana State University, with Dr.

Sands as principal investigator, to facilitate transfer of Indian rice grass technology to the co-op and to support

development of their MontinaTM

products. While producers continued

to be highly interested in the project,

when it came to investing in a new

business, they were still reluctant to

“put in more than a toe.” A number of

them adopted a position of phasing

their delivery right payments over a

period of time, or purchasing fewer

delivery rights than they could have in

order to see “how the business was

developing.” 

The business needed more working

capital in 2002 than it was generating

to enter markets in a timely manner.

Controlled growth is important, but

being overly cautious can result in

under-capitalization and the loss of

opportunity. That’s when it applied for

a working capital Value-Added

Producer Grant (VAPG) from USDA

Rural Development to expand processing capacity. Grant funds were used for

business operations, inventory development and market development. 

A feasibility study and business plan

were reviewed and approved by the

Montana USDA Rural Development

state office in

March 2003. The grant was designed

to provide assistance for the cooperative as it progressed toward becoming

a commercially viable entity. 

The VAPG helped Amazing Grains

Grower Cooperative hire key staff; to

provide cash for inventory and other

start-up costs; to provide financial

resources for market identification,

development and expansion; and to

accelerate business growth and commitment by the producers to their

value-added venture.

Expert management hired

Producers realized they did not have

all the necessary business management

skills themselves, so they hired those

skills via the management team. Two

key management staff were retained by

the co-op’s board: General Manager

Bob Warren and Doug Martin, who

provides financial management expertise. For 12 years, Warren had been

owner and operator of Cream of the

West, a Montana multi-grain, hot cereal processing company. Martin had

financial experience and planning

responsibilities with a background in operations. 

These delicious baked goods, made with Montina flour, can be eaten by people who are unable to digest gluten. A grower's hands (page 6)

brim with freshly harvested Indian rice grass seed, which the Amazing Grains growers' co-op is processing into a line of gluten-free flour

products. Photos courtesy Amazing Grains
Rural Cooperatives / July/August 2004 9

cean Spray members in

June voted down an offer

to form a venture with

PepsiCo, under which

Pepsi would have bought

the co-op’s beverage business. PepsiCo

had offered the co-op $100 million and

said it would assume some of the coop’s debt in exchange for the nation’s

leading cranberry juice brand. Instead,

the 925 members opted to continue

the 75-year tradition of operating the

company as an independent, farmerowned cooperative. 

The vote was 52 to 48 percent

against pursuing the Pepsi venture,

under which the co-op would have continued to run the agricultural business,

but the value-added beverage operation

would have gone to Pepsi. In essence,

the co-op would have reverted to being

a raw-product supplier to Pepsi. 

Ocean Spray is the top-selling brand

in the non-refrigerated juice aisle of

the nation’s supermarkets, with sales of

about $540 million last year. But cranberry prices have been depressed in

recent years, due primarily to crop

surpluses. However, the market has been coming into

better balance, and fruit

prices have again been on

the rise. In 2002, co-op members averaged $35 a barrel. 

Growing cranberries and producing

quality beverages and sauces is not the

issue for Ocean Spray. The main problem is product distribution in an industry that has become concentrated in

the hands of a few giants. Proponents

of the deal said that because PepsiCo

and Coca-Cola Co. control 75 percent

of the nation’s distribution of noncarbonated drinks, it is too difficult for a

small (by comparison) company to gain

entry to crucial marketing outlets, such

as the single-serve beverage business in

convenience stores. 

Opponents contended that the deal

would have clamped a too-low price lid

on future grower earnings at a time

when fruit prices are rising. Further,

they say other marketing deals are

possible that would not

force the co-op to give up

its value-added arm.

Some have even suggested that Ocean Spray

explore a joint marketing venture

with other co-op juice producers, such

as Tree Top, Welch’s and Florida’s

Natural.

The verdict on the Pepsi deal means

the co-op’s board will cease all talks

with PepsiCo and other potential equity

investors, focusing all efforts instead on

working with management to build the

Ocean Spray business for the future.

The decision by Ocean Spray growerowners in Massachusetts, Wisconsin,

New Jersey, Florida, Oregon,

Washington, British Columbia and

other parts of Canada will bring to an

end a lengthy process undertaken by

the board more than a year ago. ■

“Each does what he does well,” says

Warren. “The board doesn’t negotiate

broker-distributor contracts, and I

don’t tell them the proper ground temperature for seed germination.” 

Warren knows that the market will

not commit to large, new product purchases until customer reaction to the

product is known. The market must

also feel certain that a consistent, highquality and predictable volume of product is available. On the other hand, the

board and co-op members want to be

sure there is a guaranteed market for

their value-added product before they

invest in increased production. 

Mission Mountain Market — the

in-house incubator that has enabled

the cooperative to maintain low overhead and start-up costs — is not a

full-scale, commercial production

facility. But it enabled the Amazing

Grains to: get started, to enjoy a copack arrangement, to get sales under

its belt, to get a marketing program in

place, to generate cash flow and to use

offices and amenities without creating

big overhead expenses. While

Mission Mountain can support the

business-production needs of

Amazing Grains to a point, at some

juncture the co-op will need to develop its own facility. 

The co-op employs three staff at

this point, but when it moves into its

own facility, four more jobs will be

created. Four jobs at Mission

Mountain will then be available to

assist another venture. 

Timing significant moves 

When is the best time for that transition? What is the right timing for

marketing efforts? How big should the

business try to become? What level of

dependency is Amazing Grains willing

to accept? What level of sales will

enable the co-op to move into its own

facilities, use its own equipment and

labor? 

In the first 18 months, Amazing

Grains has about reached break-even,

with $222,000 in gross sales as of

March 2004. For 2004, thanks to assistance from the VAPG, the co-op

expects gross sales of $500,000. By the

end the year, it plans to be marketed in

30 states and two countries. 

Tim Anderson, Amazing Grains’

board president, says that being committed to a value-added business does

not lessen the production of risks associated with growing a new crop. The

producers were very cautious about

purchasing delivery rights and paying

for them in a timely manner. This

caused an adverse cash-flow problem. 

The VAPG assistance from USDA

softened the investment risk by providing leveraged cash to allow the purchase

of seed inventory to accelerate the

Ocean Spray rejects Pepsi offer 

O

continued on page 45
Special Section > Co-ops and Biofuels

By Dan Campbell, Editor

e-mail: dan.campbell@usda.gov

t started as the dream of

farmers and the managers of the local electric

cooperative who were

searching for a way to

add value to corn and to help stabilize

electric rates. The Chippewa Valley

Ethanol plant outside Benson, Minn.,

has not only accomplished that, it has

also been a sparkplug that ignited

efforts to reverse the rural decline

Benson seemed locked into for a time. 

“If you go back 15 years or so ago,

Benson was facing a malaise like that

of so many other rural towns with

slowly declining populations, loss of

jobs and an eroding tax base,” says

ethanol plant manager Bill Lee. Lee

first came to the town of 3,400 people

about 130 miles west of Minneapolis in

1994. At that time, he was an engineer

for the firm that built and originally

operated the ethanol plant (Delta T

Corp.) He switched over and went to

work for Chippewa Valley in 1996

when the co-op bought out Delta T’s

minority ownership position. 

“The people of Benson are survivors and have a very progressive

business philosophy,” Lee continues.

“They were willing to vote with their

pocketbooks — to invest their money

in the future of the community.” 

In the years after the ethanol plant

began operation in 1995, Benson took a

number of steps to strengthen its economy. Citizens and the business community launched a concerted effort to keep a

farm-manufacturing plant in town when

it appeared likely to move. They not

only succeeded in keeping it in Benson,

but it has since

been expanded,

now employing

235 people. 

Townspeople

also joined forces

to raise the $2.5

million needed

for remodeling to

keep the local

hospital operating

at a time when it

appeared headed

for failure. Today,

it is not only

thriving, but was recently rated as one

of the nation’s most efficient rural hospitals. Benson also will soon be home

to a new biomass powerplant —

FibroMinn — that will burn turkey

liter to generate 55 megawatts of electricity. 

The success of Chippewa Valley

and the town of Benson go hand in

hand and is indicative of “the power

of people working together in co-ops”

to boost farm income and bolster

their communities, says Jan

Lundebrek, board vice chair of

Chippewa Valley Ethanol and president of First Security Bank in Benson.

“Rather than blaming other people or

forces for the problems facing us, we

just decided that we ourselves had to

step up to the plate and do what was

necessary to turn things around.” She

also credits several USDA Rural

Development loan programs (such as

the Community Facilities loan program, which provided a $1.5 million

loan for the hospital) for helping in

Benson’s revival. 

“Confidence breeds confidence,”

adds Lee, noting that another indicator

of improving economic health here is

the increase in the number of new

homes constructed in recent years. 

10 July/August 2004 / Rural Cooperatives

Fueling a rural revival 

Ethanol co-op supports farmer income 

while providing lift to rural community

I

More than good neighbors, Chippewa

Valley Ethanol and Benson, Minn.,

depend on each other for continued success. Clockwise from upper left: the grain

delivery area at Chippewa Valley; an old

municipal swimming pool has been

completely renovated and expanded; new

housing developments are another sign

of a strong local economy; the CNH-
Study sees widespread rural

benefits from renewable fuels

The Renewable Fuels Association

(RFA) commissioned a study in 2002,

“Ethanol and the Local Community,”

that shows dramatic impacts on a local

economy from ethanol plants. The

study was based on a hypothetical, 40-

million-gallon-per-year ethanol plant

and national averages. Such a plant is

likely to: 

• Provide a one-time boost of $142

million to the local economy during

construction;

• Expand the local economic base of

the community by $110.2 million

each year through the direct spending of $56 million; 

• Create 41 full-time jobs at the plant

and 694 jobs throughout the entire

economy;

• Increase the local price of corn by

an average of 5-10 cents per bushel,

adding significantly to farm income

in the general area surrounding the

plant;

• Increase household income for

the community by $19.6 million

annually;

• Boost state and local sales tax

receipts by an average of $1.2

million (this varies depending on

local tax rates);

• Provide an average of 13.3 percent annual return on investment over 10 years to a farmer

who invests $20,000 in an

ethanol production facility. 

Benson has been fairly reflective of

these averages. 

“It’s no wonder many communities

view value-added opportunities like

ethanol production as the best way to

revive stagnant rural economies,” says

Bob Dinneen, former RFA president.

“The economic activity generated by

an ethanol plant ripples throughout

the region as new wage-earners spend

their money at local businesses.” 

Plant accident only

temporary setback

Chippewa Valley Ethanol was successful virtually coming out of the

chute, operating at 100 percent of

capacity within 30 days of start-up and

averaging 98 percent of design capacity

during the first six months of operation. 

But there have been struggles

and setbacks. “It certainly hasn’t been a cake walk — there

have been challenges all along

the way,” says Lundebrek, who

was recently honored as

Minnesota’s Woman Banker of

the Year and who, along with

her husband, has a 360-acre

farm. 

The biggest of these challenges occurred last October,

when there was an explosion,

apparently sparked by welding work

being done on the plant’s saccharification tank. One employee was killed

and two others were injured. Major

damage was sustained by the plant

building and a fuel tanker truck.

Through sheer determination and

hard work while coping with the

tragedy, workers had the plant back

in partial operation in just three

weeks. 

The plant was originally built to

produce 15 million gallons of ethanol

per year, and subsequent modification

boosted capacity to 20 million gallons

annually. But most new plants today

are being built to produce around 40

million gallons, and the co-op knew it

would need to expand capacity again to

remain competitive. So, in June 2003,

a major expansion was completed that

Special Section > Co-ops and Biofuels

Rural Cooperatives / July/August 2004 11

Benson manufacturing plant

has expanded to 235 employees, who build cotton harvesters and crop-protectant

applicators; slipping and sliding

at the new pool; The Swift County Benson Hospital, once in danger of closing, is now rated as

one the nation's best run rural hospitals; lab operator Kevin Wilts tests ethanol and grain samples at Chippewa Valley; the co-op's sign outside the plant has been joined by one for its

Glacial Grain Spirits subsidiary. Photos by David Lundquist
Special Section > Co-ops and Biofuels

12 July/August 2004 / Rural Cooperatives

boosted production

capacity to 45 million gallons.

Lee says that is

about the optimal

size for ethanol plants. After that, they

have to start going so far afield to procure corn that the extra transportation

costs offset any gains from economy of

scale in the processing operation.

As part of the expansion project,

the co-op spent several million dollars

extra to install special thermal oxidizers, which put plant residues through

an extra firing to reduce emissions into

the air. “The plant is within a mile of

town, but now you would never know

it’s there,” Lundebrek says. 

Total investment in the plant to date

is about $55 million, and annual sales

are running at about $62 million.

Membership is about 950. Membership

includes producers, co-op elevators

and other local investors. 

Lundebrek says non-producer

investors are virtually all local people

(ranging from dentists to merchants)

who wanted to invest in the co-op “to

show their support for agriculture,”

which she says is still the lynchpin to

the region’s economy. “If agriculture

isn’t successful here, they know they

won’t be either.” 

USDA loan program 

helps young producers 

The original plant construction in

1994 cost $28 million, for which the

co-op needed to raise $10 million. The

initial equity drive required members

to purchase at least 5,000 shares, which

represented an investment of $10,000.

But many growers at that time were

cash strapped. “It was difficult to get

some people to commit, because we

had been through a series of bad (corn)

price years and they were hurting,”

Lundebrek recalls. 

USDA Rural Development’s thennew Cooperative Stock Purchase

Program played a key role in helping

young producers without strong collateral to buy shares in the co-op. Under

The co-op is distilling Shakers Original

American Vodka through a subsidiary. 

Photo courtesy Shakers Vodka

While the majority of ethanol production in the United

States is being produced by cooperatives, most of the

fuel is being marketed through non-cooperative businesses. Thus, there has been a gradually increasing level of discussion about the need for regional, or even a

national co-op marketing organization to help producers

capture more of the profits from the ethanol market.

Chippewa Valley Ethanol is doing more than talking

about it. It is a founding member of Renewable Market

Products Group (RMPG), a cooperative-LLC formed in

the late 1990s by five producer-owned ethanol plants.

RMPG recently expanded to eight members. By the

end of this year, plant manager Bill Lee expects the

membership to have grown to a dozen ethanol co-ops. 

These plants are located in Minnesota, Iowa, South

Dakota, Nebraska and Missouri. After the expected

expansion, the marketing co-op will be handling about

500 million gallons of ethanol annually, which Lee says

would rank RMPG as the fourth largest marketer of

ethanol in the nation. 

The regional spread of members offers big benefits

in reducing freight costs, because fuel can be shipped

from plants located closest to a customer and/or take

better advantage of transportation infrastructure in

their area (i.e., proximity to the most cost-effective rail

lines, trucking routes, etc.). 

“The impetus behind RMPG was producers’ desire

to own and control the marketing function of their

ethanol — and to share in the proceeds derived from

this part of the business,” says Lee, who was elected

this year as chairman of the national Renewable

Fuels Association. Not only does the co-op pool revenue and expenses, but members also share data

that have helped them establish production benchmarks and improve their products and processing

efficiency. 

Through RMPG, members also enjoy combined buying power, which Lee says has proven very beneficial

for procuring supplies such as the enzymes needed to

produce ethanol. 

“We’re not out to be the biggest fuel marketer, but a

lot of producers find it attractive that we are a farmer

owned and controlled business. They feel that through

RMPG, they can better control their destiny.”

Ethanol co-ops unite to form marketing venture 
Special Section > Co-ops and Biofuels

Rural Cooperatives / July/August 2004 13

this program, USDA will guarantee a

maximum of 80 percent for up to

seven years for loans of up to $400,000

to producers buying stock in a valueadded agriculture co-op. 

“Our bank issued loans to a number of those producers, many of

whom might not otherwise have been

able to join,” she says. It turned out

to be a good business for the producers, the co-op, the bank and USDA .

“None of those loans ever went

delinquent,” Lundebrek says proudly.

(Call 202-720-8381 and request PA

1640 for a free brochure on this program.)

That helped the co-op raise all but

$1.5 million of what was needed. The

gap as filled through a consortium of

10 banks which agreed to issue a letter

of credit for that amount. Growers

paid it off through an assessment of an

additional 10 cents per bushel of corn. 

In this way, the letter of credit was

redeemed in just eight months. The

co-op also received a $500,000, interest-free loan from the Rural Utilities

Program of USDA Rural Development

to use as collateral when financing 

the plant. 

When the plant was expanded, the

co-op made an additional stock offering to members for $2 per share, or

$2.50 per share for non-members. “We

could have sold stock to new members

for a higher amount than that, but the

co-op wanted to keep the price low to

help young farmers invest,” says

Lundebrek.

“Bio-refinery” outlook

needed for long term 

Jill Nichols Euken, a biofuels expert

with the Iowa State University

Extension office, says she sees great

potential for continued expansion of

the ethanol and biodiesel industries “if

the owners see their plants as the first

step in building a bio-refinery. 

“Ethanol, biodiesel and the coproducts they produce — dried distillers grains (DDGs) and glycerin —

will fast become commodities. The

goal needs to be building true biorefineries where the renewable feedstock is fractionated into various components. Each component should then

be used for its highest value: intermediate chemicals, fibers, nutrients,

fuels, etc.).” Euken notes that this is

the way in which petroleum refineries

have maximized their profits. 

“The greatest pitfall facing the

industry is farmers stopping with the

production of (just) ethanol,” she

stresses. “The best ethanol and

biodiesel operations are those that are

continuing to look for ways to improve

their processing and expand their

product line.” 

For drymill ethanol plants, the most

important of their byproducts is dried

distillers grains (DDGs). Chippewa

Valley is selling its DDGs to a broker

that works for several co-ops, with the

primary market at present being the

turkey industry. About 50 percent of

the plant’s production is being sold

within 30 miles of Benson. 

Another unique venture the co-op is

involved in is production of premium

vodka — called Shakers Original

American Vodka. It is being marketed

through Infinite Spirits of Nappa

Valley, Calif. (see March-April 2002

issue of Rural Cooperatives, page 20).

The vodka is distilled from Minnesota

wheat, purchased from co-op members

and others. While corn can be used to

make vodka, Lee explains that wheat

produces a smoother, slightly sweeter

taste needed for premium vodka. 

In developing the recipe and distilling process for the Shakers Vodka, coop members and Infinite Spirits staff

took several trips to Poland to study

the vodka processing methods used by

Old World masters of the art. 

While Infinite Spirits owns the

Shakers brand, Chippewa Valley is 100

percent owner of Glacial Grain Spirits,

which holds the contract to manufacture the vodka. 

Smaller board should

prove more effective 

To improve the efficiency of its

board, Chippewa Valley members

recently voted to reduce the size of

their board from 18 to 9 members, and

reduce the number of directorial districts from six to three. 

Lee says the co-op board engaged

in much discussion following on the

heels of a USDA study (by the

Cooperative Services office of USDA

Rural Development) that showed seven

to nine to be the average number of

directors for co-ops nationally. “That

sort of made clear what we had already

been thinking: that 18 is an awful lot

of directors for trying to reach a consensus. After lengthy deliberation, we

put it to the members, and a large

majority approved the reduction.” 

The co-op has compiled a manual

that helps directors, committee members and employees understand just

how the co-op works. “It spells out

things such as what is expected of a

“The people of 

Benson are survivors...

they were willing to

vote with their pocketbooks — to invest their

money in the future of

their community.” 

— Bill Lee
14 July/August 2004 / Rural Cooperatives

Special Section > Co-ops and Biofuels

By Steve Thompson, Assistant Editor

s ethanol the answer for

corn producers? 

Across the Midwest

and Great Plains, 75

ethanol production facilities are now in operation, with an

additional 13 under construction. Fuel

ethanol consumption is climbing

briskly, and over 3 billion gallons are

expected to be produced in 2004,

adding $15.3 billion to the gross

domestic product and supporting

143,000 jobs. 

Whatever its future, there’s no

doubt that ethanol is a growth industry

at the moment.

Most domestic ethanol is produced

by fermenting corn, and corn growers

see production of the fuel as a hedging tool against low commodity prices

and a way to add value to their product. Currently, the ethanol market is

very attractive, with ethanol consumption in the United States climbing apace with the expansion of production. 

But is ethanol production an answer

to volatile corn prices? Does it offer

farmers a stable source of income? 

Is it possible to find the capital to start

up an ethanol plant without bringing

in outside owners? And will a farmerowned ethanol plant provide an acceptable rate of return on investment? 

The answer to those questions is a

resounding “maybe.”

Successes and failures 

Glacial Lakes Corn Processors is a

new-generation cooperative that operates an ethanol plant in Watertown,

S.D., through a limited-liability corporation, Glacial Lakes Energy LLC. By

all accounts, the operation is doing

quite well. It is entirely locally owned

and has succeeded in its goal of raising

the local price of corn received by area

farmers. (See page 21.)

The plant is performing beyond

expectations: with a rated output of 40

million gallons per year, it actually

produces closer to 50 million gallons,

helping to put its accounts firmly in

the black.

Tri-State Corn Processors has

another story to tell. Formed by farmers in and around the small agricultural

town of Rosholt, S.D., Tri-State

recently filed for bankruptcy after

being closed for an entire year. With a

much smaller capacity than the Glacial

Lakes plant, Tri-State’s facility was

unable to operate even in the ballpark

of its design specifications, and was

unable to raise the capital needed for

repairs and modifications. 

The co-op hopes to get the plant up

and running under a Chapter 11 plan

that will have the plant operating at

capacity while fully paying off all creditors. But local farmers and creditors

have taken a big financial hit, and it

will be years before their community

recovers. (See page 32.)

Ethanol’s appeal rests on the expected growth in its demand for use as a

fuel additive or alternative fuel. As the

most economical substitute for methyl

tertiary butyl ether (MTBE) — a gasoline additive used to meet

Environmental Protection Agency

requirements in certain markets —

Great Expectations

Ethanol is hot, but what is the long-term outlook for biofuel? 

I

committee member

or director,” Lee

notes. 

The co-op has also

made good use of the

director-training program offered

through the Quentin Burdick Co-op

Center at North Dakota State University.

“It’s absolutely excellent — I recommend

it highly,” says Lundebrek. 

Based on her experiences so far as a

co-op director, she says the best advice

she can offer to other directors is this:

“When you are elected to the board,

your overall objective is to do what is

necessary to keep the co-op operating

soundly and efficiently. You must listen

to the members, but the efficient operation of the co-op is always the top concern. That may not always be the most

popular thing to do.”

Supply and demand remain in balance

While there has been some fear that

the rapid rate of increase in the number

of production plants would glut the

ethanol market, so far demand has been

increasing right along with the supply,

Lee says. 

RFA has even estimated that the

already sky-high gasoline prices this

summer would likely be from 14 to 15

cents per gallon higher were it not for

the nation’s ethanol and biodiesel supply. 

Lundebrek says critical mass is needed for the industry to take solid root.

“If we want ethanol to be the fuel of the

future, we need to produce enough supply that (buyers) can depend on it.” ■
Rural Cooperatives / July/August 2004 15

Special Section > Co-ops and Biofuels

ethanol would seem to provide rich

value-added opportunities for farmers

(see sidebar). And current high petroleum prices have made it attractive as a

fuel extender — a way to stretch the

supply of gasoline. 

However, to be practical for these

uses, ethanol’s price must be close to

that of gasoline. And therein lies one

important rub. 

Subsidy rate extension

key to ethanol’s future

Currently, the use of ethanol in

motor fuels is subsidized through a

reduction of up to 5.3 cents a gallon to

the federal excise tax of 18.3 cents,

which is paid by gasoline marketers

and refiners. However, the tax reduction is due to expire in 2007, requiring

Congressional legislation to extend it.

While such extensions have been

passed before, the 2003/2004 energy

bill, which contained further extensions, was stopped by a filibuster in the

U.S. Senate due to opposition to the

subsidy as well as other issues.

Another possible monkey wrench in

the works is a plan by the Cargill

Corporation to import ethanol from

Brazil via El Salvador. El Salvador is

one of the countries covered by the

Caribbean Basin Initiative, which

allows for duty-free importing of

goods manufactured in participating

nations. Up to 7 percent of a previous

year’s domestic ethanol output can be

imported under current law, which

means that up to 230 million gallons

could enter the United States under

the tariff barrier this year. 

By producing the ethanol in Brazil

from sugar cane, Cargill can lower

costs of production dramatically.

Brazillian ethanol costs about 60 cents

a gallon, while ethanol “rack prices” in

the Midwest in early July were averaging about $1.80 per gallon. Refining

ethanol to fuel grade in a plant in El

Salvador, as proposed, would mean the

$60 billion agribusiness firm could not

only further undercut costs, but avoid

duty payments, allowing it to underbid

domestic producers easily.

California, the largest oxygenated

fuel market in the United States, has

banned the use of MTBE as a gasoline

additive, and the EPA may decide to

ban the substance nationally. The

excise tax credit is not the only help

offered ethanol producers by the

federal government. 

USDA programs support

bioenergy development

Through its Bioenergy

Program, USDA’s Commodity

Credit Corporation offers

assistance to ethanol and

biodiesel producers, helping

compensate them for the cost

of increased commodity purchases, for the expansion of

production in existing facilities

and for starting new ones. In

2002, CCC paid $78.7 million

for nearly 228 million gallons

in increased ethanol production. 

USDA Rural Development offers

the Biobased Products and

Bioenergy program, which provides loans through its Business

and Industry (B&I) program for

projects that convert farm and forest products into energy. Through

its Cooperative Services office,

USDA Rural Development also

administers the Value-Added

Producer Grants program, which

provides funds for planning and

working capital to agricultural coops for marketing valueadded agricultural products,

including biofuels (for a list of

VAPGs issued to date for alternative energy projects, see

page 34). 

Many states also offer

incentives for ethanol.

Minnesota subsidizes

ethanol at 20 cents per gallon, and requires all gasoline to contain ethanol or other oxygenators.

Two types of processes are used to

produce ethanol from corn. One, called

the “wet-mill” process, soaks the corn

kernels in water so that their components can be separated mechanically,

before grinding the starchy part of the

seed for fermenting into ethanol. 

Wet-milling can be used to

produce a wide range of goods,

including corn syrup, highfructose corn syrup, corn

starch and corn oil, as well as

extracting complex high-value

chemical compounds for use in the

pharmaceutical and other

industries. The flexibility of

the wet-mill process means

that the operator can switch

output to different products in

response to market changes.

The down side is its complexity, high expense and the

necessity to build very large

plants to achieve economies of

scale. Wet mills are generally

built and operated by large corporations.

The second method, the “drymill” process, is much simpler. The

entire kernel of corn is ground and

then fermented. The products of

fermentation are ethanol, carbon

dioxide, distillers grain and the liquid left over from the distillation

process. This remaining liquid is

concentrated into condensed distillers solubles (CDS), which are

usually combined with the distillers grain to make a high-quality animal feed containing about

28 percent protein. 

Carbon dioxide can be sold

if a market for it is easily

accessible, but it is not an

important factor in profitability. The sale of distillers

grain, however, often is the

difference between profit

and loss. 

Graphic by Stephen Thompson
Special Section > Co-ops and Biofuels

16 July/August 2004 / Rural Cooperatives

Success factors

The success of a

farmer-owned

ethanol plant hinges

on a number of factors, including the

following:

• The supply of corn. Transportation

costs for corn are a significant factor;

the plant usually must be able to

depend on getting its corn within

about 30 miles.

• The price of corn. The higher the

price of corn, the lower the profit

margin of the operation. Even at

$1.60 per bushel, grain costs make

up half of total operating expenses.

• Accessibility to transport. If a local

or regional ethanol market exists, the

product can be moved by truck, at

costs between 2 and 7 cents per gallon. Transporting ethanol to markets

on either coast will cost at least 13

cents per gallon. For longer distances,

the product can be moved by truck,

but rail is more economical, and

access to a rail spur can make a big

difference in profitability. For a plant

located on a navigable waterway,

barge transport to the Gulf of Mexico

and then transfer to ships may offer a

highly cost-effective means to reach

some markets — most notably

California, which used to receive

most of its MTBE through seaports.

• Size of the facility. Dry-mill

ethanol plants are subject to

economies of scale. The costs of

labor and administration, for example, are very similar for a plant that

produces 40 million gallons per year

and for one that produces half that

amount. The costs of construction,

estimated at an average of about

$1.50 per gallon of annual output,

fall with increasing size up to about

a 40 million-gallon yearly capacity.

Above 40 million gallons, economies

of scale in construction costs do not

increase significantly. 

• Design and engineering. Ethanol

production is a mature technology,

but incremental improvements continue to be made in efficiency and

plant design. A well-thought-out and

well-constructed plant design, taking

into consideration the factors unique

to the site, is fundamental to a successful ethanol operation.

• Supply of energy. Ethanol plants

use large amounts of energy, usually

In 1990, Congress amended the Clean Air Act to

establish two programs to reduce air pollution from

road-going vehicles by requiring changes in the formulation of fuel sold in certain designated areas. The

Reformulated Gasoline (RFG) program was intended to

reduce smog-forming pollutants such as nitrogen and

sulfur oxides. The Oxygenated Fuels program was to

reduce emissions of carbon monoxide. 

Meeting the requirements of both programs meant

that gasoline refiners selling in the affected markets

had to add oxygen to their fuel.

The two substances most widely used as fuel oxygenators are methyl tertiary butyl ether (MTBE) and

ethanol. MTBE is cheaper to use, but after a decade

has been found to have some major disadvantages.

One is its tendency to leak from storage tanks and contaminate groundwater. Another is that it evaporates

readily, and breathing its fumes is unhealthy and may

even lead to cancer. 

Although the Environmental Protection Agency has

not banned MTBE, some states, including California,

have, resulting in a big demand for the only practical

substitute for MTBE — ethanol.

Ethanol is ethyl alcohol — the same alcohol as in

beer, wine and other alcoholic beverages. And it’s produced in much the same way as distilled drinks such

as whisky and vodka. Feedstock, usually corn, is fermented with yeast in large tanks and the alcohol produced by the fermentation is distilled. While distilled

beverages usually contain about 50 percent alcohol,

fuel-grade ethanol is distilled to be almost pure, except

for a small amount of unleaded gasoline added as a

“denaturing” agent to prevent the fuel’s consumption

by humans. 

Approximately 35 percent of the ethanol molecule is

oxygen. When added to gasoline, the oxygen in ethanol

makes for cleaner combustion, reducing carbon

monoxide emissions by up to 30 percent. Usually the

fuel is mixed in a ratio of 1 part ethanol to 9 parts gasoline, but in vehicles configured to burn alternative fuels

ethanol can also be used pure, or as an 85/15 blend

with gasoline.

Contrary to allegations by some opponents of

ethanol, the fuel does not require more energy to make

than is available in the finished product. USDA’s Economic Research Service calculates that it takes 1 btu

of energy to produce 1.24 btu worth of ethanol. 

— By SteveThompson

Clean Air Act kickstarted ethanol
Special Section > Co-ops and Biofuels

Rural Cooperatives / July/August 2004 17

in the form of natural gas, both to

distill ethanol and to dry distillers

grain and CDS. Local gas prices are

a vital factor in determining profitability, and locating the plant so as

to minimize the costs of constructing

a gas supply pipeline can be important in reducing start-up costs. Even

better would be a location close to an

existing manufacturing site that

offers excess steam or electric power

as a byproduct. For plants dependent

on natural gas, rising gas prices can

have a marked effect on profits: for a

40-million-gallon-per-year plant that

dries its distillers grain, an increase

of $2 in the price of a thousand cubic

feet of gas will increase annual operating costs by nearly $5 million.

• Market for distillers grain and

CDS. As with the supply of corn, the

transport costs of delivering the fermentation byproducts to the end

user weigh heavily in the profitability

equation. In addition, the energy

expended to dry distillers grain and

CDS is a large proportion of total

costs. Locating near a feedlot or

other livestock operation that will

use the entire output of distiller’s

grain saves significantly on transport

costs. But even more important, a

nearby animal feed user may allow

the ethanol facility to deliver the

product wet, which is not only preferred by the animals but saves as

much as 50 percent in energy costs.

Wet distillers grain has a shelf life of

Biodiesel is diesel fuel made from plant or animal

products. It is produced by modifying fats and oils into

a substance that can be used by diesel engines. The

modification process, known as transesterification, is

not complicated; in fact, some private individuals make

biodiesel at home from used restaurant cooking fat for

use in their own vehicles.

Biodiesel is not simple vegetable oil, although some

people do burn unmodified vegetable oils in diesel

engines. Doing so can cause problems, among them

excessive carbon buildup in combustion chambers and

reluctance to start.

Most biodiesel in the United States is made from

soybeans, although lard, tallow, or any other biological

source of fats can be used. European biodiesel production relies mainly on rapeseed, which offers a higher yield and can be grown in areas not suitable for soybeans. 

Blue Sun Biodiesel is a limited liability company

affiliated with a cooperative that proposes to produce

biodiesel from rapeseed grown on the western High

Plains area of Colorado and neighboring states.

Biodiesel is a superior fuel in many respects. It

burns more cleanly than petroleum-based diesel, and

also has higher lubricity and detergent properties.

Among its disadvantages is the fact that its high detergency can loosen debris in fuel systems that formerly

used petroleum diesel, clogging fuel filters for a while

if they’re not carefully watched. 

At higher concentration, it can also degrade parts

made of certain kinds of rubber. However, biodiesel is

usually used as an additive in petroleum diesel at 10-

percent ratio, at which level it causes few problems.

The use of biodiesel is endorsed by all major manufacturers of diesel engines in the United States.

The EPA is promulgating regulations that will drastically reduce the amount of sulfur in diesel fuel. Sulfur

is used as a lubricant for fuel-injection pumps and other diesel fuel system components. The removal of sulfur will mean that vehicles will emit fewer components

of acid rain in their exhausts, but new additives will be

needed to restore the necessary lubricity. Biodiesel

added to diesel fuel restores this lubricity and results in

lower emissions, as well.

Sulfur reduction rules are to go into affect in three

years. That’s good for the environment, says Doug

Tiffany, a research fellow at the University of Minnesota who studies biodiesel. However, the low-sulfur fuel

doesn’t lubricate as well, so additives will be needed to

keep fuel-injection pumps and other parts working

smoothly. “Adding even 1 or 2 percent biodiesel

restores the fuel’s lubricating qualities, slowing engine

wear and tear,” he says. 

Biodiesel backers also cite national self-interest as

a reason to use the new fuel. The United States burns

roughly 30 billion gallons of diesel fuel a year, equivalent to more than a quarter of the country’s annual

crude-oil imports. “By using more biodiesel, we are

reducing our dependence on foreign oil and contributing to our own economy, while decreasing pollution,”

said Jenna Higgins, a spokeswoman for the National

Biodiesel Board. “It’s a win-win-win situation.” 

Biodiesel: the 10 percent solution 
18 July/August 2004 / Rural Cooperatives

Special Section > Co-ops and Biofuels

By Dan Campbell, editor

e-mail: dan.campbell@usda.gov

he success of an ethanol

plant rests upon a fourlegged stool, with the

legs representing the

ethanol, corn, dried distillers grain (DDG) and natural gas markets. You can’t

sit on that stool unless all four legs are

planted firmly on the ground, advises

Dave Nelson, board chairman of the

MGP Ethanol cooperative in the

north-central Iowa community of

Lakota. 

The price of corn and natural gas

are the two major inputs that determine operating cost, and the value of

ethanol and DDG are the

major outputs that determine revenue. 

“It’s a balancing act, and it takes a

savvy risk manager who knows how to

hedge to do it right,” says Nelson, who

with two brothers has a 5,000-acre

corn/soybean/hog farm. 

In late spring, the cost of ethanol

had everyone in the industry smiling.

When interviewed in early June,

Nelson said MGP was getting $1.30 a

Balancing Act

Risk-hedging strategy big part of Iowa ethanol co-op’s success

T

Lab technicians at MGP Ethanol perform continuous testing to ensure the

co-op’s product meets the highest

quality standards. Photo courtesy MGP

Ethanol

only three to six

days, and because

two thirds of its

weight is water, a

distance of 50 to 60

miles is the limit it

can be transported economically. 

A 40-million-gallon-per-year ethanol

plant will produce enough distillers

grain every day to feed up to 240,000

or more head of cattle.

• Financing. Getting the necessary

capital is the first and often most difficult hurdle faced by any startup

operation. In the case of cooperatives

looking to build an ethanol plant,

financing can be especially problematic due to the difficulty of raising

enough equity from the membership

to enable obtaining funds from

lenders. For a 40-million-gallon plant

— the size considered the “sweet

spot” in terms of economies of scale

— a co-op of 3,000 members would

require investments of $20,000 each.

Various methods for raising funds

Some co-ops, among them Mid

Missouri Energy, have been able to

raise the needed funds from producer

members. Others have dealt with the

challenge by establishing a limited liability corporation (LLC) to build and

run the plant, which allows sharing

ownership with outside investors. 

In some cases, financing schemes have

included granting partial ownership and

sometimes plant management contracts

to constructors. For co-op members, the

issue in such arrangements can become

whether or not they control or benefit

from the operation in the end.

No industry operates in a vacuum,

and, like any other, success in the cornbased ethanol business may stand or fall

on factors over which co-op members

have no control. While the industry is

expanding now, a day will come when

the market reaches saturation, and corn

ethanol plants will find themselves in

close competition. 

Further competition may come in

the form of technologies now being

developed to produce ethanol from

low-cost agricultural residues such as

wood waste, corn stalks and cobs,

stover, wheat straw and whey. Other

possible low-cost feedstocks include

municipal solid waste, switch grass and

even fast-growing hardwoods.

While nobody can predict the future

or determine every last variable, any

cooperative contemplating an ethanol

operation must do a rigorous due diligence before making a decision. ■
Rural Cooperatives / July/August 2004 19

Special Section > Co-ops and Biofuels

gallon for its ethanol vs. $1.10 a year

ago. It markets its fuel through a Texasbased broker, an arrangement which he

says has been working fairly well. 

Co-op leaders are well aware that

the success or failure of ethanol plants

also hinges on how well they can market byproducts. MGP has even adopted “Ethanol and more” as the co-op’s

motto. “But with ethanol doing so

well, we are really concentrating on

that market right now,” Nelson says. 

Estimating costs

The MGP plant devours a lot of

corn — 17 million bushels annually. So,

the goal is to buy as much corn as possible when prices are low, and to cutback to “hand-to-mouth” purchasing

when the prices are soaring, Nelson

says. Ethanol prices also ebb and flow,

and the co-op strives to lock in advance

sales as far as possible when it believes

the market is peaking.

Transportation costs also play a big

part in determining the cost of corn

procurement. MGP Ethanol buys all

of its corn within a 30-mile radius of

the plant. But only 20 percent of the

co-op’s 1,000 members farm within

that radius. Nelson is a case in point.

His farm is located 60 miles from the

MGP plant. 

Like the other 80 percent of the

members — who farm in Iowa, Illinois

and Minnesota — Nelson works with

others growers closer to the plant, who

ship corn to MGP Ethanol on

Nelson’s behalf. 

Most of the popular hybrid corn

varieties grown in the area also have

high yields of the fermentable starch

desired for dry-mill ethanol plants. So

no special corn varieties have had to be

planted just for ethanol production,

Nelson says. 

MGP Ethanol recently completed

its second year in operation and is running at better than 100 percent of

capacity. It is producing at an annual

rate of 48 million gallons from a plant

that was rated at 45 million gallons.

Equity drive a struggle

The co-op was spawned by Ag

Ventures Alliance, a rural business

incubator that identifies value-added

Grain feedstock represents from 50 to 70 percent of

the cost of producing ethanol, so having access to a

reliable grain supply that can be procured at a reasonable price is the biggest single factor in deciding

where to locate a plant, says David Coltrain, coordinator for the Kansas Cooperative Development Center at

Kansas State University. 

Proximity to large livestock feeding operations is

another big advantage for ethanol operations in marketing dried distillers grains (DDGs). Not only does

proximity to feeders cut transportation costs, but the

DDGs can be sold in a semi-wet status, which means

less natural gas is burned in drying it.

Natural gas is a major expense for ethanol operations. “It can easily cut a plant’s natural gas consumption

nearly in half, for approximately a 5-percent reduction in

total operating cost for a typical plant,” says Coltrain. 

Kansas has six ethanol plants in operation, and

one more under construction. Proximity to the state’s

large cattle feeding yards is a major asset for ethanol

plants in the Sunflower state, Coltrain notes. 

Availability of state subsidies can also help,

Coltrain says. The federal subsidy is currently 52 cents

per gallon, and many states offer additional subsidies,

normally in the range of 5-10 cents per gallon for a limited amount of ethanol produced. 

Another key factor is building a plant that is

large enough to be competitive. At least 40 million gallons produced annually is widely considered to offer

the best economy of scale.

Management and marketing expertise are the

other big keys to success. Coltrain notes that some

ethanol co-ops are less successful due to poor management. The talent pool seems to be steadily improving, he says, noting that some of the plant-building

firms have established good training programs for

plant operators. 

Coltrain cites two recent research developments as

showing great potential for the ethanol industry. The

first development is close to reality while the second is

“still down the road.” University of Illinois researchers

have developed a new method to remove the corn

germ in dry-mill ethanol plants, which may reduce the

cost of manufacturing ethanol by 10 cents per gallon

by capturing the valuable corn oil as a co-product. University of Minnesota researchers have also produced

hydrogen from ethanol in a reactor small enough to

heat homes and power cars, offering new long-range

market potential. 

— By Dan Campbell

Proximity to grain supply, livestock feeders

key factors in ethanol plant site selection 
Special Section > Co-ops and Biofuels

20 July/August 2004 / Rural Cooperatives

manufacturing

opportunities for

farmers. Once the

business plan was in

hand, it required 53

producer meetings in three states during 2000-2001 to raise most of the $22

million in equity needed for the $58

million plant. Members, who must be

producers, were required to buy a minimum of 5,000 shares at a cost of $7,500.

The average investment was $12,000. 

“It wasn’t easy,” is Nelson’s succinct

assessment of the equity-drive process.

Eventually, farmers put up $17 million,

and the fledgling co-op was able to raise

the additional $5 million with a bond.

Members can sell their stock to other

producers through the Allerus brokerage in Fargo, N.D. 

MGP received a matching grant last

year for $150,000 under USDA Rural

Development’s Value Added Producer

Grant Program to study the potential

for biodiesel production or expansion of

the ethanol plant.

The co-op “shopped around” to find

the right company to build its plant.

“We did a spreadsheet and listed all the

benefits and negatives of each candidate,” Nelson says. Eventually, it went

with ICM of Colwich, Kan., to design

the plant and Fagan Co. of Granite

Falls, Minn., to build it. “We’re fairly

happy with how it went, although there

are always some things you would like

to change,” Nelson says. 

The co-op hired a CEO, who in 

turn was given the latitude to hire his

own management staff. “We were

focused on finding someone who could

not only operate the plant, but who

could manage people.” That man is Dan

Hernandez, who now oversees a staff of

36 employees. 

Iowa production to surge 

Seven other dry-mill ethanol plants

are currently operating in Iowa, with

eight more under construction or in the

planning stage. Nelson says he is glad

the industry is expanding. “It needs to

get bigger. And the way demand is

increasing for energy, it will continue to

get bigger.” 

One thing that must be watched, he

says, is to not build plants so close to

each other that they begin to cannibalize each others’ fuel stock. But so far,

that does not seem to be happening. 

The industry is also spreading to

more states, which Nelson says will

help to increase political support for

ethanol beyond the Midwest. 

He sees a trend toward new plants

being pursued as producer-owned, limited liability corporations rather than

pure co-ops. This is primarily due to

the need to secure more outside investment capital from non-producer members. “It can also be much quicker and

easier to raise capital from non-producers,” he notes. But critics of such an

approach say that producers may then

wake up one day to find that they have

lost control of their plants. 

“The major problems for farmer coops in the ethanol industry is securing

quality management,” says David Morris

of the Institute for Local Self Reliance, a

Minneapolis-based educational organization that provides technical assistance

and information on environmentally

sound economic development strategies.

Since co-ops are owned by farmers, and

farmers comprise all, or at least the

majority, of the board of directors, they

control the operations. “But they often

lack expertise in management, industry

experience and entrepreneurial innovation — those are the key problems,”

Morris says. 

On the other hand, the key asset for a

co-op plant is its relationship to the

farmers, he continues. “In the late 1990s,

when corn prices were sky-high, corn

farmers who owned ethanol plants were

willing to take below-market prices to

help the company, knowing that part, or

perhaps even all of that, would be

returned to them in higher dividends,”

Morris says.

“Another key problem is not the coops themselves, but the lack of federal

(and sometimes state) policies that give

local and farmer owners a higher priority,” Morris adds. “The federal incentive

and grant programs do not distinguish

between an absentee-owned plant and a

farmer-owned plant.”

Good timing

“The timing of this strong ethanol

market has been perfect for co-ops

formed in the past four to five years,”

Nelson says. And it’s been good for

consumers too, he adds, noting that

gasoline prices would be significantly

higher were it not for ethanol. 

Predictions that Midwest farmers

will continue to see corn yield increases

of 1.5 bushels per acre each year for

the foreseeable future bode well for the

supply being sufficient for both livestock feed and ethanol production, he

notes. 

Nelson says his best advice to other

farmers looking to go into ethanol is

this: “Just make sure you have the time

and energy for it. It takes a tremendous

amount of time. We met every week for

two years in developing the co-op. So

you need to make sure you are paid for

your time. You can do it in a shorter

time frame if you hire someone else to

do it all for you, but then it’s not really

your plant.” ■

“The major problem

for farmer co-ops in

the ethanol industry

is securing quality

management.”

— David Morris
Special Section > Co-ops and Biofuels

Rural Cooperatives / July/August 2004 21

By Steve Thompson, Assistant Editor

lacial Lakes Corn

Processors Cooperative

shows just how successful

a farmer-owned ethanol

operation can be when

conditions are right. Located in

Waterton, S.D., Glacial Lakes was

begun for much the same reasons as

many others: with only

one elevator in town,

corn producers didn’t

have a good market for

their crop. 

Adding value by turning their crop into

ethanol seemed to be

the best answer to

chronic low prices. So

11 local farmers decided

to take on the risk, and

founded the cooperative

in September 2000 to

start an ethanol operation. 

After hiring a general

manager and a manager

to oversee construction

of the plant, Glacial Lakes signed up

two firms with proven track records in

building ethanol facilities. ICM of

Colwich, Kan., was chosen to design

the plant, using its own proprietary

technology, in cooperation with Fagen

Inc., of Great Falls, Minn., which

would build it. 

Fagen and ICM had worked together on a number of previous successful

projects — starting out building power

plants and later getting into ethanol

production — and they had excellent

reputations among ethanol producers.

ICM also has a successful grain merchandizing operation, through which it

markets the byproducts of ethanol distillation: distillers grains and liquid

stillage for livestock feed.

Struggle for funding 

As usual for new business ventures,

the stumbling block was financing. The

plant was projected to cost $54 million,

and to obtain financing from lenders,

the co-op needed to raise at least $20

million. Even the smaller amount was

far more than local farmers could come

up with. The co-op looked into partnerships with corporations and other

entities, but soon ran into issues over

who would control the operation. 

Says Tom Branhan, the current general manager, “The problem was, they

wanted management of the plant as

part of the deal.” The co-op members

weren’t ready to accept being, as they

saw it, passive spectators in their own

operation. 

The alternative was raising the

funds from individuals, not necessarily

farmers — but this meant moving

away from a strict farmers’ co-op

model. The co-op began an equity

drive in March 2001, making available

shares of common stock in a new entity: Glacial Lakes Capital, LLC. 

To keep the venture from becoming

a South Dakota firm in name only,

ownership of shares was limited to residents of the state, and the equity drive

concentrated on members of the local

community. While the success of the

plant promised a boost to the area,

raising funds among local residents was

much more difficult than more conventional ways of financing. 

It meant making sales pitches to

hundreds of people, many of them on

an individual basis, and

many of whom could not

afford to risk very much of

their capital.

But the community

came through. In the end,

Glacial Lakes raised the necessary nest egg through sales

of stock to more than 825

residents of the surrounding

area. In June 2001, the co-op

and the LLC agreed to

merge and formed Glacial

Lakes Ethanol, LLC.

Construction began the following month. The plant

began operations in August

2002, and has operated consistently above its rated

capacity of 40 million gallons per year,

providing a welcome head start on

retiring the operation’s debt.

Lessons learned 

Are there things they would do differently if they had to do it over? Yes,

says Branhan. Most of them have to do

with changes in the layout of the plant

to improve traffic patterns and loading

of trucks. “There are things that could

have been done differently to make the

plant more user friendly, make it easier

to keep clean,” he says. But he wouldn’t

change the mechanical design. “We’ve

got no complaints about that. Ron

Fagen still questions me about the

operation of the plant so they can

Community investments helped launch plant 

G

Glacial Lakes Ethanol stresses community involvement, including fun

activities such as this winning entry in the Watertown, S.D., 4th of July

parade. Photo courtesy Glacial Lakes Ethanol

continued on page 45
Special Section > Co-ops and Biofuels

22 July/August 2004 / Rural Cooperatives

Lost Horizon

Membership ‘horizon’ problem preceded demise of MCP 

By Anthony C. Crooks, Ag Economist

USDA Rural Development

t the time that farmerowned ethanol co-ops

and LLCs began popping up like wildflowers

after a spring rain, the

nation’s biggest and oldest producerowned ethanol operation — Minnesota

Corn Processors (MCP) — decided it

was time to close up shop, selling out

to agribusiness giant Archer Daniels

Midland (ADM) in 2002. Why MCP

chose to exit the industry just at the

time when the ethanol market was

starting to boil caused considerable

second guessing at the time, and with

the good times the industry is currently enjoying, the Monday morning

quarterbacking has certainly not

diminished. 

While the demise of MCP as a producer-owned business has been well

covered in the press, the spotlight has

perhaps not focused as sharply as it

should on the membership horizon

problem the co-op was facing at the

time. It’s a problem nearly every co-op

faces to some extent, and is certainly a

factor in some of the other recent proposed co-op sales and conversions. 

In the case of MCP, cash-strapped

members of what started as a New

Generation co-op (before converting

to an LLC) were offered a deal that

paid them three times the depressed

price their stock was trading for at the

time, and the majority voted for the

deal. Many of them have since objected bitterly that the board and membership were forced into a “rush to judgment,” and that the process should

have been considered much more

closely than it was before the vote was

taken. One director has even been

quoted as saying the board spent more

time considering the purchase of one

elevator than it did on the sale of the

entire MCP business. 

MCP launch helped

spark NGC movement 

In the early 1980s, corn and soybean farmers were caught up in the

fervor of the early stages of what came

to be known as the New Wave, or

New Generation, cooperative movement. But while it may have had some

of the earmarks of a religious revival,

this movement was rooted firmly in

the material world. At co-op organizational meetings, state economic development specialists and others preached

a “gospel” of self-help and collective

action in pursuit of new, value-added

agricultural ventures.

The New Generation Cooperatives

(NGC) promised to address shortcomings of the traditional farmer marketing cooperative structure, while maintaining the principles and benefits of

collective action. 

MCP was formed during this period

in Marshall, Minn., by a group of reasonably successful farmers. They saw

an opportunity to become a link in the

value-added chain, intending to use

this new-style cooperative structure to

generate income by building a wet mill

corn processing plant. They set up the

A

The former Minnesota Corn Processors plant, now owned by ADM, near Marshall, Minn.

Photo by Greg Devereaux, courtesy Marshall Independent

Background: America's abundant fields of corn and soybeans yield fuel that doesn't have to

be imported. Photo courtesy CHS/LOL
Special Section > Co-ops and Biofuels

Rural Cooperatives / July/August 2004 23

co-op accordingly, agreeing to do a

number of things differently than is

typical with traditional co-ops. It started by processing corn starch, soon

shifted into ethanol production and

eventually added high fructose corn

sweeteners (HFCS) to its products. 

A difficult start was followed by a

number of successful years. Within a

year of the move to add HFCS to its

product line, much of the soft drink

industry switched over to HFCS, so

for a time that product proved to be a

great asset to the co-op. But eventually

a combination of factors — including

drought, high corn prices and a saturated market for corn sweeteners —

combined to suck the wind out of the

co-op’s sails. Another major factor was

a horizon problem, in which the supposedly marketable equity shares in the

co-op could not be sold due to a lack

of other producers interested in investing in the plant. 

Traditional vs. New

Generation co-ops

A successful traditional marketing

cooperative offers two principal benefits: (1) a reliable market at a fair price

for the members’ product and (2)

patronage refunds at the end of a successful marketing year. 

But there are problems with the traditional model. Because membership

shares can’t be sold on the open market, they aren’t liquid and there is no

way to confer upon the bearer expected present value of the firm’s future

earnings. In other words, the value of

the stock doesn’t go up to reflect the

success — present or anticipated — of

the business, and the owner can’t easily

pass on his investment in the co-op to

someone else. 

An NGC is different. One of its

major attractions is that the benefits of

ownership accrue not just through

members’ patronage, but through their

equity investment. Just as with stocktrading, investor-owned firms (IOFs), a

well-functioning secondary market is

expected to confer upon the stock

owners the option of cashing out their

equity investment when they want to

reduce or cease their dealings with the

cooperative. They are also provided

the opportunity to make capital gains

on their equity investment. 

However, these benefits are contingent upon the existence of a market for

the NGC’s stock. If such a market

doesn’t exist, or exists only in theory,

this ownership benefit is reduced to

those of the traditional co-op. As a

result, rationally behaving NGC members, lacking a way to accrue or realize

the equity they anticipated, can be

expected to pressure the cooperative to

increase current earnings at the

expense of future investment and earnings. This conflict of planning horizons — today’s earnings vs. tomorrow’s

returns, is called a horizon problem. 

This can occur when members pressure the co-op into making unrealistically large cash payouts, speeding up

equity retirement programs or liquidating co-op assets (see sidebar, page

24). In the case of MCP, it contributed

to the complete liquidation of the coop’s assets through the sale to ADM. 

Proud beginning

In 1980, MCP leaders proposed to

not undertake this new ethanol enterprise on the cheap, as is often the case

with traditional marketing co-ops.

Every prospective member had to

make a substantial investment, at least

$10,300 in equity capital to build the

plant. 

And for each share of stock the

members purchased, they received the

right and the obligation to deliver corn

to the cooperative, along with a residual claim on the net returns of the

cooperative. In addition, their equity

was tied directly to those delivery

rights — which would be transferable

and for which it was expected that a

secondary market would develop.

In 1983, MCP began operating a

$55 million plant on the north side of

Marshall, Minn. Equity had been

raised by farmers who purchased stock

in 5,000-bushel increments. The co-op

also received $1.9 million in tax assis-
Special Section > Co-ops and Biofuels

24 July/August 2004 / Rural Cooperatives

tance from the city. 

MCP struggled

to break even for

the first four years.

By its own admission, members were

just farmers trying to find their way in

a new business and a new industry.

They first had to learn how to manufacture a product to a customer’s specifications — and they nearly went broke

in the process. But by 1987, they had

expanded into ethanol production,

worked bugs out of their delivery system and had started to turn a profit. 

Even the Minnesota legislature was

caught up in the excitement over

ethanol. Seeing public investment in

farmer-owned fuel ethanol plants as a

positive way of supporting rural communities, Minnesota lawmakers developed a plan to subsidize plants on a

per-gallon basis. MCP received

approximately $33 million in ethanol

production subsidies from Minnesota

during the next 10 years. 

New Wave flagship

The MCP plant soon became a

great source of pride to a large number

of people. And rightly so — success

has many fathers. In an area with a

rich tradition of collective action, this

New Generation cooperative was

assuming a leadership position in a

new industry, in its community and

state, as well as among farmer cooperatives. Better still, it was returning some

real money to its members. 

For the next seven years, and especially from 1991-95, the cooperative

grew in number of locations, capacity

and prosperity. A plant in Columbus,

Neb., was added in 1991. Further

expansion occurred, including the

addition of high fructose corn sweetener production in 1995 — a move

which required the co-op to borrow

$124 million. 

By that time, the cooperative was

becoming a major player in the agriEditor’s note: the following is based on “The Structural Characteristics of Farmer Cooperatives and their

Behavioral Consequences,” by John M. Staatz, which

appeared in Cooperative Theory: New Approaches,

USDA/ACS Service Report 18, July 1987. 

A marketing cooperative is said to have a horizon

problem when its members pressure management to:

Increase the proportion of cooperative’s current

payments to members relative to investment, i.e., a

larger “cash payout”; 

• Speed up equity retirement programs and/or

increase the dividend paid on capital invested in

the organization; or

• Liquidate the cooperative’s assets, in whole or in

part.

• The horizon problem may be mitigated somewhat,

however, if membership in the cooperative can be

“sold” with the farm. Selling the membership

allows the expected future earnings of the cooperative to be capitalized into the farm’s sales value.

This valuation/capitalization is even more straightforward when the farm is incorporated and the

corporation itself is a member of the cooperative. 

The horizon problem may also be reduced somewhat if the cooperative provides for an inter-generational transfer of membership within families. Whether

retiring members derive satisfaction from bequeathing

their heirs a stronger cooperative, or desire to gain a

higher retirement from the association, the effect is the

same: older members are more willing to help with

long-term financing of the cooperative, even though

they will not benefit directly from their investments.

If the cooperative has a completely open membership policy, then the value of the cooperative may also

be fully capitalized into a farm’s sales value.

In smaller cooperatives — particularly those in

which the members are strongly tied to one another,

whether by common social or religious beliefs — the

horizon problem may be diminished by older members’

moral obligation to their predecessors to leave a

stronger cooperative to their heirs. 

Extreme horizon problems

Members often pressure a cooperative’s decision

makers to increase current payments at the expense of

future earnings when the expected value of the cooperative may not be fully realized. 

A cooperative is said to have an extreme horizon

problem if:

• The per-member capital investment in the co-op 

is large;

• The co-op has a closed membership;

• Few of the member firms are legally incorporated;

• The intergenerational transfer of membership

within families is prohibited;

• The co-op has a large and/or diverse membership.

Co-op horizon problems: do you have one? 
Special Section > Co-ops and Biofuels

Rural Cooperatives / July/August 2004 25

culture industry, standing among

corn-processing giants such as Cargill

and ADM. The value of the membership’s initial investment more than

doubled as stock appreciated from an

initial offering price of $2.06 to $4.50

in the mid-1990s. And, as a result of

several stock splits in the mid-1980s,

charter members more than tripled

the value of their holdings. There

were reports of paper millionaires

among initial investors during those

halcyon days. 

“Fighting for our lives”

However, the flagship was soon buffeted by very heavy seas, and began

taking on water. Market shocks, competition from a sister NGC and some

glaring gaps in oversight in the cooperative’s operations all combined in

1996 to give MCP a very hard lesson

in the realities of being a major player

in the commodity manufacturing business. Board Chairman Jerry Jacoby,

Springfield, Minn., told the

Minneapolis Star-Tribune “forget all

the warm, fuzzy buzzwords of ‘farmerowned’ and ‘value-added.’ We were in

a fight for our lives.” 

Cost overruns from the 1995 expansion made for a rough start in 1996.

But the cooperative’s most serious difficulties were caused by a drought that

began in 1995 and persisted into 1996,

causing corn prices to skyrocket. And

because it had no hedging strategy to

lock in its offering price to members,

MCP found itself especially vulnerable

as the costs of its feedstocks nearly

doubled. 

Grain marketers traditionally use

the futures market to protect themselves against major price movement.

But MCP’s leaders believed that the

market assurances offered by a hedging

operation were, if not redundant, surely an extravagance, because their members were contractually obligated to

deliver grain. They soon learned that

they were wrong. 

Members had the option of selling

corn in 1996 for a high farm-gate price

or supporting their co-op, and many

chose the former (although they still

had to deliver what they were contractually obligated for). The fact that so

many declined to sell additional corn

to their co-op when it was badly needed led some to say greed won out.

Others said it was simply farmers

doing what they had to do in order to

survive. Regardless, in hindsight it is

obvious that management should have

been hedging, just as almost everyone

else was. 

Too many mouths at the trough

If the price of either ethanol or

high fructose corn sweetener were

tied to its cost of production, the

cooperative might have been able to

pass on a portion of its higher costs to

its customers. However, product

prices were, if anything, inversely

related to production costs in 1996, as

MCP and all market participants discovered. And fructose prices were not

improved later that year when Mexico

closed its borders to imports of the

sweetener in order to shore up its

own market. 

But the worst blow to the co-op

members may have come at the hands

of another NGC. Corn fructose prices

went into a two-year tailspin with the

arrival of another competitor in the

already saturated market. It’s hard to

imagine a worse time for the opening

of the $261 million ProGold corn

sweetener plant in Wahpeton, N.D.

Just how unfortunate these circumstances were became clear when

ProGold was forced into an alliance

with Cargill, which soon acquired it

outright. 

In the words of a board member

quoted in the Star Tribune, MCP

“ended 1996 with an upside down balance sheet.” The cooperative realized

net losses of $63 million, had acquired

long-term debts in excess of $410 million, and its bankers were demanding

payment. 

Distress signals 

By early 1997 it was clear that MCP

was in need of a rescue. The cooperative needed, if not a savior, certainly a

sympathetic partner to help pay its

bills and get it through a very tight

spot. There was no shortage of interested parties. Candidates included

Cargill and A.E. Staley Mfg. of Illinois.

However, the MCP board was most

receptive to ADM’s chief, Duane

Andreas. Andreas was seen as “calm,

well-spoken, down-to-earth and easy

to deal with,” according to reports in

the Star-Tribune.

The MCP board chose ADM in

1997 as the best possible suitor because

its requirements were the least onerous. In return for the $120 million in

cash that the cooperative received to

pay its bankers, ADM received only 30

percent of MCP’s stock and asked for a

very limited oversight privilege: the

corporation wanted to be consulted

before any major capital investments

were undertaken. 

With its bankers appeased, corn

prices returning to normal levels and a

modest recovery of the fructose and

ethanol markets, MCP began to turn

things around in 1999, with significant

gains in revenue and net returns. And

with continued progress over the next

two years, MCP was able to report

modest net returns and reduce its

long-term debt by 40 percent, to $245

million.

Short-term respite

Meanwhile, a significant but relatively unnoticed transformation

occurred in the cooperative’s legal

structure and bylaws. In 2000, MCP

went through a tangle of legal procedures to convert from a Minnesota

Cooperative to a Colorado Limited

Liability Company (LLC). The reason

given was “tax purposes.” 

Perhaps it was, but of significantly

more consequence may have been the

fact that, as a LLC, MCP was no

continued on page 47
26 July/August 2004 / Rural Cooperatives

Special Section > Co-ops and Biofuels

By Diane Searcy

MFA Director of Communications

hen Jerry Taylor

stepped to the podium

in November 2003 to

address delegates and

employees of MFA Oil

Co., it was a momentous occasion for

him and for his cooperative. MFA Oil

was entering its 75th year in business

and Taylor was addressing the group

for the first time as its president.

Paying tribute to past leaders,

Taylor listed some decisions they made

that ultimately positioned MFA Oil at

or near the top of Missouri’s fuel suppliers and, in the case of propane, near

the top nationwide. He reminded his

audience that their company had been

conceived in 1929, survived the Great

Depression and the war years, and

then flourished when post-war prosperity put an automobile in every driveway and a tractor on every farm.

Turning from the past to his vision

for the future, Taylor promised the

member-owners that, under his leadership, focus would be placed on making

MFA Oil “the trusted rural energy

expert.”

“To accomplish that,” he said, “we

must continue to deliver the highest

quality products in the marketplace,

and they must be the right products.”

Chief among the right products, he

declared, are biodiesel and ethanolblended gasoline. He went on to reaffirm MFA Oil’s continuing commitment to marketing those products. 

Early commitment 

MFA Oil’s involvement with renewable fuels goes back to the late 1970s,

when the company first began distributing ethanol-blended gasoline, then

MFA Oil committed to development

and marketing of renewable fuels

W

Ethanol refineries, such as this plant, should be located in an area where most of their

grain needs can be secured within a 30-mile radius. 

In the wake of the

Sept. 11 terrorist

attacks, Congress

and the press

increased their 

support for 

renewable fuels. 
Rural Cooperatives / July/August 2004 27

Special Section > Co-ops and Biofuels

known as gasohol. High ethanol prices

forced it to drop the blends after about

a year. 

The mid-1980s was a period of

growth for MFA Oil. While maintaining its agricultural base, the cooperative entered the convenience store

business and established a series of

company-owned and operated stores,

called Break Time, throughout rural

Missouri. In another move designed to

capture more of the increasingly

mobile, price-conscious customer base,

MFA Oil was one of the first businesses in the state to actively promote the

unattended fueling site with its PetroCard 24 operations.

So by 1989, when increased efficiencies in production of ethanol, the phaseout of lead in gasoline and changes in

tax laws made marketing ethanol-blended gasoline cost-efficient, MFA Oil was

perfectly positioned to sell it.

A couple years later, representatives of the Missouri Soybean

Association approached MFA Oil

management and requested that the

co-op supply diesel fuel for a research

project to be conducted at the

University of Missouri-Columbia.

MFA Oil agreed and began supplying

soy biodiesel to two rural electric

cooperatives in central Missouri. At

the time, however, demand for the

product wasn’t great enough to justify

keeping the biofuel in the company’s

product line.

That changed in 2002. In the wake

of the terrorist attacks on Sept. 11,

Congress and the press increased their

support for renewable fuels, and MFA

Oil’s member-owners, whose crops are

used to formulate biodiesel, started asking for the product. MFA Oil responded by making soy biodiesel available to

customers throughout its market area.

All blends were available, but B2,

which the company sold at 2

cents per gallon over the price

of its premium diesel fuel, was

the biggest seller.

Response was immediate.

In a state that has nearly 5

million acres planted to soybeans, farmers led the way

as consumers embraced the

product MFA Oil marketed

as “homegrown fuel — good

for vehicles and equipment,

good for the environment,

good for America.”

Between March and August,

the cooperative sold nearly 2

million gallons of soy biodiesel. In

2003, sales totaled 8.4 million gallons, and MFA Oil projects an

increase of at least 10 percent in

2004, which means biodiesel would

account for nearly 10 percent of total

diesel sales.

Long history with ethanol

While MFA Oil’s active promotion of

soy biodiesel is relatively new, the cooperative has a longer history marketing

ethanol-blended gasoline. In the early

1990s, when a federal excise tax reduction made it feasible to sell the blended

product at the same price as regular

unleaded gasoline, MFA Oil made that

the focus of its marketing efforts at

Break Time convenience stores and

Petro-Card 24 self-fueling sites. 

Although both auto and small

engine manufacturers approved the use

of a 10 percent ethanol blend, some

consumers were skeptical and acceptance of the blended fuel was limited.

But MFA Oil believed in the product

and continued its marketing efforts

throughout the 90s and into the new

millennium. In 2003, the cooperative

sold 32.4 million gallons of super

unleaded gasoline, a 10 percent ethanol

blend, which amounted to 25 percent

of total unleaded sales. Projections are

for a 20-percent increase in 2004. 

Also in 2003, MFA Oil started selling E-85, a blend of 15 percent gasoline and 85 percent

ethanol, at selected

sites. E-85, which can

be used only in “flexible fuel vehicles,” has

the potential to significantly reduce dependence on foreign oil

and promote better air

quality.

For more than 30

years, MFA Oil has

been committed to

development and marketing of renewable

fuels, working closely

with the Missouri

Corn Growers Association and the

Missouri Soybean Association. Jerry

Taylor’s keynote address at the cooperative’s 74th annual meeting was a

rededication of the company’s policy to

aggressively market products that use

crops grown by its farmer-members. ■

MFA Oil supplies biodiesel to power trams at the Missouri 

State Fair. Photo courtesy of MFA Oil

MFA Oil Company, established in 1929, celebrates its

75th anniversary in 2004.
28 July/August 2004 / Rural Cooperatives

Special Section > Co-ops and Biofuels

By Steve Richter

Editor, Cooperative Partners

re-blended biodiesel may

soon become as easy to

buy as a pair of pants

now that it is available

off the rack — the bulk

fuel load-out rack, that is.

Continuing to forge the way in

building the biodiesel distribution

infrastructure, CHS Inc. has installed

injection equipment at McPherson,

Kan., and Council Bluffs, Iowa, and

bulk fuel terminals and injection equipment at McFarland, Wis. At these locations, Cenex Ruby Fieldmaster now

can be blended with biodiesel as it is

pumped into fuel transports.

CHS has long been a proponent of

soy biodiesel. To help propel its use, the

cooperative has developed loading facilities and supported marketing and education efforts through the United Soybean

Board and state checkoff boards.

Introduction of biodiesel injection

technology at terminals by CHS is an

industry first. Until now, cooperative

fuel suppliers have been required to

add soy methyl ester, the basis of

biodiesel, to diesel fuel at local loadout

locations after it was transported from

terminals.

Building critical mass

To Hays, Kan., producer Harold

Kraus, pre-blended biodiesel is a significant development for producers,

their co-ops and other industry players. He predicts the new capability will

drive more critical mass for the

biodiesel market, making broader use

of soybeans.

Besides providing greater efficiency

and economy for local cooperative fuel

dealers as they supply their rural customers, terminal biodiesel injection

makes it more likely the steadily growing soy-based fuel will be offered at

non-farm outlets. Wider availability at

truck-stop pumps, for example, will

help the budding biodiesel industry tap

the much broader, over-the-road diesel

market, Kraus points out.

A member of the National Biodiesel

Board representing the Kansas Soybean

Association, Kraus says his local fuel

supplier, Midland Marketing Cooperative, is into biodiesel sales and supply in a big way, after taking the first

steps more than a year ago.

Stan Maskus, Midland Marketing

petroleum manager, says the board

developed a long-range plan that

includes a focus on crop-based fuels —

both ethanol and biodiesel. The directors have several overriding reasons to

promote the plan: Alternative fuels

make more use of crops produced by

co-op customers, they lessen dependence on foreign oil, and they provide

clean-burning, renewable alternatives

to the finite fossil-fuel supply.

Biodiesel also offers a realistic

option for replacing the lower lubricity

levels in reduced-sulfur diesel fuel,

mandated for off-road use by 2006. 

In everyday use on farms, biodiesel

already has proven to be equal or better than conventional diesel fuels.

“There’s no detectable difference in

equipment operation, particularly at

the 2-percent level,” says Kraus, who

practices no-till in his irrigated operation on the western edge of the Kansas

soybean belt. A confirmed premium

diesel fuel user for a number of years,

he particularly likes Ruby Fieldmaster

B2, the biodiesel version of the Cenex

premium fuel.

Advocates for expanded capacity 

Kraus and his co-op have been

ardent advocates for expanding the

capacity and capability of the cooperative fuel distribution system.

Bob Metz, chairman of the National

Biodiesel Board who grows 2,000 acres

of soybeans, corn and wheat on both

sides of the South Dakota/Minnesota

border, applauds the enthusiasm coming from Kansas and everywhere soybeans are grown. 

Both Kraus and Metz would like to

see biodiesel receive more federal support to help boost the fledgling industry so it can eventually begin soaring

like its older sibling, ethanol. Last

year’s proposed energy bill, which fell

Buying biodiesel ‘off the rack’

CHS investing in new injection technology

to streamline biodiesel blending process

P

Harold Kraus, a member of the National

Biodiesel Board, attended a press conference at the fuel terminal in McPherson,

Kan., in April, where media learned about

new technology that allows Cenex-branded fuel distributors to buy pre-blended

biodiesel at the terminal. Photo by Steve

Richter, courtesy CHS/LO'L
Rural Cooperatives / July/August 2004 29

Special Section > Co-ops and Biofuels

Around Danvers, Minn., John Carruth is known as a

standup guy. Honest and hard working, a pillar of the

community who has built a 4,000-acre farming operation that is now run by his three

sons. Over his 71 years, he’s been on

more local, state and national boards

than he can remember.

But when it comes to promoting

and using ethanol and the new E85

blend, Carruth has been known to

engage in a bit of subterfuge.

“My wife Elaine doesn’t know it,

but she’s running on E85 in her

LeSabre,” says Carruth. “We’ve got a

couple of flex-fuel vehicles and I use

it about half and half in my Ford

Ranger pickup that isn’t equipped for

it, and it works just fine.”

E85 — “E” stands for ethanol and

“85” for 85 percent content — is a

blended fuel made from domestically

produced corn. Extensive testing has

shown that its performance is similar

to that of gasoline, and its price is

usually well below unleaded regular.

Octane ratings for E85 are between 100 and 105.

Joel James, assistant manager at Glacial Plains

Cooperative, Benson, Minn., where Carruth buys his

fuel, is also enthusiastic about the growth and future of

E85. “We pumped our first gallon of E85 in January

2000,” James says. “Even before we put the pumps in

Appleton (Minn.) this year, we were pushing 200 customers.

“It’s the flex-fuel vehicles we’re going after. One

big potential is government and post office vehicles.

There are some company motor pools that can use it

and, of course, farmers.” The potential customer

base grows every year as auto makers produce more

flex-fuel vehicles. “There are a lot of people driving

flex-fuel cars that don’t know it,”

James adds. 

A big incentive for local cooperatives that opt to offer E85 is

minimal infrastructure change.

“Basically we installed a new

tank in Benson,” James says. “It’s

double-walled and in Appleton

we’re using an existing, belowground tank. And there’s some

signage that has to change when

you offer E85.”

Ethanol-gasoline blends also

change with the seasons, says

James. More gasoline is in the mix

during winter to help with starting.

But E85 can be transported in

existing tank trucks with some

minor precautions throughout the

year. 

“I really like promoting E85,”

James adds. “It’s good for the

farmers and the environment, and I’m really proud of

the co-op system for taking the lead in this. 

I’d much rather have the price of corn go up than the

price of foreign oil.”

“As farmers, we know how to grow corn,” adds

Carruth. “I was just over looking at some of our irrigated corn and it’s going to run 200-plus. The only problem

we have with ethanol is knowing how to market it. And

we’re doing a lot better at that.” 

— By Mark S. Johnson, Managing Editor, 

CHS-Land O’Lakes 

Farmers burn more of what they grow with E85

short of passage in the Senate by two

votes, contained tax provisions beneficial to biodiesel.

These tax-incentive provisions,

which amount to $1 per gallon of soy

ester, have survived in a proposed

highway spending bill that would 

provide six-year funding for road improvements across the country. The

first-ever biodiesel tax incentive would

be available to diesel excise taxpayers

and other fuel distributors who purchase biodiesel and blend it into diesel

fuel. The end result would be reduced

cost for end consumers in both taxable

and tax-exempt markets.

Al Anderson, CHS vice president,

governmental and public affairs, says

record-high oil prices have heightened

the urgency of discussions involving

the energy and transportation bills,

which could improve the prospects for

passage of biodiesel incentives. 

“CHS will be well positioned when

the biodiesel tax incentive is passed

because the incentive will likely be

taken at the terminal level,” says Metz.

“This latest investment by CHS in

improved distribution infrastructure

further demonstrates the company’s

commitment to biodiesel and the soybean farmers who grow the seedstock

to make this new fuel.” ■

John Carruth fills up at Glacial Plains

Cooperative’s E85 pump in Benson, Minn.

Photo courtesy CHS/LO'L
30 July/August 2004 / Rural Cooperatives

Special Section > Co-ops and Biofuels

By Ann Hastings,

GROWMARK Communications Director

here are many reasons

why agricultural cooperatives have made a significant commitment to

renewable fuels, but they

all come down to a central theme: It’s

the right thing to do. Dan Kelley,

chairman of the board and president of

Bloomington, Ill.-based GROWMARK Inc., says the cooperative system he serves has nearly 30 years of

commitment to the distribution, use

and promotion of renewable fuels.

The right thing for U.S. farm industry

“As a farmer, it’s imperative to build

additional markets for the crops I

grow. Our safe and abundant food supply depends upon the continued existence and success of the U.S. farmer,”

Kelley notes. “Renewable fuels help in

this regard. For example, nearly 1 billion bushels of corn will be used for

ethanol in 2004. That helps generate

farm profitability.” 

According to the U.S. Department

of Agriculture, ethanol production

adds 30 cents to the value of a bushel

of corn. The Renewable Fuels

Association notes that ethanol production adds $4.5 billion to U.S. farm

income annually. 

Kelley cites three primary reasons

GROWMARK is supporting the distribution of renewable fuels: 

• It’s the right thing to reduce dependence

on foreign oil. The U.S. has the products, technology and distribution

systems to make America less

dependent on foreign sources of oil,

according to Kelley. “What’s needed

now is a federal energy policy that

endorses renewable fuels as not only

good for our environment, but as an

added measure of homeland security,” he adds.

• It’s the right thing for the environment.

Biodiesel is the only renewable fuel

to have fully completed the health

effects testing requirements of the

Federal Clean Air Act. The use of

biodiesel in a conventional diesel

engine results in substantial reduction of unburned hydrocarbons, carbon monoxide and particulate matter when compared to emissions

from diesel fuel. Ethanol-blended

fuel substantially reduces

carbon monoxide and volatile

organic compound emissions. The

corn-based substance is added to

gasoline to meet oxygenate level

requirements mandated by the 1990

Clean Air Act amendments and to

raise octane level.

• It’s the right thing for the U.S. economy. In the past 15 years, the ethanol

industry has built nearly 75 plants.

Plus, there are almost 100 new

ethanol projects being discussed all

over the United States, according to

the National Corn Growers

Association. “Investments being

made in ethanol production translate into significant numbers of jobs

in largely rural areas,” Kelley notes.

“This growing industry is literally

helping to fuel our economy.”

GROWMARK early 

biofuels proponent

GROWMARK was a pioneer in

making ethanol-blended gasoline available to the public in the 1970s. Today,

nearly 70 percent of all gasoline the

cooperative and its members sell in

Illinois, Iowa and Wisconsin contains

an ethanol blend. Sales of ethanolblended gasolines have increased from

4 million to 70 million gallons during

the last 10 years.

“FS member cooperatives were the

first in Illinois to offer biodiesel

statewide, starting in 2002. Today, 40

percent of GROWMARK’s diesel fuel

sold throughout the Midwest contains

soy-based biodiesel. Plus, it is available

in many locations at our gas station

operations, in addition to delivery to

the farm,” Kelley says.

The GROWMARK System’s efforts

to increase use of renewable fuels

come under an umbrella called the

“Home Grown Fuels” campaign. The

central message is focused on energy

independence. The campaign’s launch

in January 2002 coincided with the coop’s push to make soy-based biodiesel

available throughout the Midwest. 

“With the ‘Home Grown Fuels’

campaign, we wanted to introduce

biodiesel and reemphasize our efforts

in the development and testing of

ethanol products,” says Mike Lockart,

GROWMARK marketing manager of

alternative fuels. 

The right thing 

GROWMARK’s Kelley says time is right for

renewable fuels to gain larger share of market 

T
Rural Cooperatives / July/August 2004 31

Special Section > Co-ops and Biofuels

“With biodiesel, our member cooperatives started hand-mixing and loading the product on trucks like it was

done when ethanol was first introduced,” Lockart says. “It shows the

cooperation and determination of our

sales force. Without them, it would

not have worked. The logistics will

remain challenging until we reach the

sales volume that supports delivery and

storage of mass quantities of biodiesel.

But that will come faster than it did

with ethanol, because of the lessons we

learned through its introduction.”

According to Lockart, who

also serves on the National

Biodiesel board, biodiesel is one

of the most widely accepted

renewable fuels in the United

States. “You can pick up a paper

in Phoenix, Albuquerque or

Peoria and see stories about

school districts or other companies using the product,” he adds.

Extensive testing 

efforts underway

GROWMARK member

Evergreen FS Inc., in

Bloomington, Ill., recently conducted emissions tests on two of the

city’s mass transit buses using a 5 percent biodiesel blend. The buses were

first tested while using No. 2 diesel

fuel. Then, they ran on the biodiesel

blend for two months. The Illinois

Department of Transportation conducted an opacity test to measure the

density of smoke coming from the

exhaust of the buses. In one bus, a 10-

percent reduction in particulates was

found. The other bus had particulates

reduced by 5 percent.

GROWMARK also tests and markets E-85, a blend of 85 percent

ethanol and 15 percent unleaded gasoline in conjunction with the Illinois

Corn Growers Association, Illinois

Department of Commerce, National

Corn Growers Association, National

Ethanol Vehicle Coalition, Governor’s

Ethanol Coalition, Archer Daniels

Midland (ADM), Aventine Renewable

Energy Inc., Ford Motor Co., Chrysler

Corporation and General Motors.

“We are a major supplier of E-85 in

the U.S.,” Lockart says. “For 10 years,

we’ve marketed E-85. Recently, the

U.S. Postal Service began phasing in

E-85-compatible vehicles in locations

that have created a sales spark.”

The GROWMARK System sells E85 to state and federal fleet operators

in 12 states.

Another promising renewable fuel is

E-diesel, a blend of 15 percent

ethanol, 5 percent additive chemistry

and 80 percent diesel fuel. GROWMARK, along with the Illinois

Department of Commerce, ADM,

Pure Energy, Illinois Corn Growers

and the Chicago Transit Authority has

tested E-diesel fuel.

“We are trying to demonstrate the

viability of an alternative to diesel fuel

for the heavy- duty engine fleet,”

Lockart notes.

Testing to-date has included laboratory engine trials, a commercial trucking fleet, 15 Chicago Transit Authority

buses and on-farm machinery trials.

The final stage of testing has begun in

different geographies in different climates during harvest and tillage operations. GROWMARK is blending and

arranging delivery of the fuel to various sites. Emissions will be certified on

various sizes of equipment and flammability will be tested. Findings will be

submitted for final approval of the fuel,

which should take approximately two

years to complete.

Challenges of bringing

renewable fuels to market

“The benefits of renewable fuels are

many, but marketing the products can

be a challenge,” Lockart adds.

“Turning points will be if and when

Congress adopts a renewable fuel standard and if tax incentives are offered at

the state and federal levels.” 

He remembers well the late

1970s and the process of gaining

public acceptance for ethanol. 

“We splash-blended one order

at a time until distributors had

enough demand to make it economically feasible to store

ethanol blends in bulk,” Lockart

notes. “It wasn’t until the early

‘90s that ethanol was available

pre-blended at the rack for mass

distribution. Farmer cooperatives like GROWMARK stood

in the gap to get ethanol off the

ground and to push for it to be

in place at the retail pump.

Today, a 10 percent blend is standard

at gas stations.

Biodiesel is taking a similar, but

accelerated path, according to Lockart. 

“Developers of biodiesel learned

from ethanol’s history. They received

approval earlier from equipment manufacturers, marketing efforts are better

developed and coordinated and distributors are sitting up and taking

notice of demand potential,” he

explains. “Farmers have stepped up to

the plate to use biodiesel and that has

helped acceptance to grow across the

agricultural industry as well as transportation fleets. 

“I’m looking forward to seeing how it

takes off from here. The time is right.

The product is right. And we can rally

around biodiesel as an answer to some

of the challenges facing our country, our

co-ops, and our farmer-members.” ■

About 40 percent of GROWMARK diesel fuel sold throughout the Midwest contains soy-based biodiesel. Photo courtesy GROWMARK
32 July/August 2004 / Rural Cooperatives

Special Section > Co-ops and Biofuels

By Stephen Thompson,

Assistant Editor

etting up an ethanol

plant is no automatic

path to prosperity. Just

ask the investors in TriState Ethanol, a limited

liability corporation (LLC) founded by

a farmers cooperative. 

For the members of Tri-State Corn

Processors Cooperative, founded in

1994 in Rosholt, S.D., an ethanol plant

seemed to be an answer to the problems they faced as commodity producers: low prices, exposure to the whims

of the market for an undifferentiated

product with few buyers and many

sellers, and no way to tap into the

profits others derived from adding

value to their crops. 

Like Alice in Wonderland’s Red

Queen, many commodity producers face

a situation in which they continually

struggle just to keep in one place.

Keeping abreast of a constant upward

trend in productivity demands rising

expenditures for operating inputs and

equipment while also dealing with a

constant downward pressure on prices.

Producing a value-added product

seemed to offer a way out of this conundrum, and ethanol was by far the most

attractive and popular opportunity.

Outside expertise, resources needed

Tri-State soon found that starting

up a profitable ethanol operation

required expertise and a number of

skills and resources that weren’t readily

available among its members.

Foremost was access to capital. As a

cooperative, Tri-State was prevented

from selling voting shares to nonfarmers — and, as with many farmerowned ethanol ventures, the members

could not raise sufficient funds among

themselves. 

The next step was to form a limited

liability corporation (LLC) that could

sell shares. But even then, they had no

luck finding financing for their venture. “We tried to finance the project

ourselves,” says Steve Hesch, current

manager of Tri-State Ethanol, “but our

sources didn’t come through.” It soon

became clear that they would have to

seek outside help.

A second dilemma was obtaining

the expertise to build the plant. With

no experience or training in that arena,

the stockholders would also have to

rely on outside help to find designers,

engineers and builders with the requisite skills.

Those problems seemed solved

when they found a consultant who specialized in putting together ethanol

projects. The consultant linked them

up with a team consisting of a design

firm, a “construction coordinator” and

a construction company, that together

promised a working plant at what

seemed to be reasonable terms. He

also found a group of investors from

Omaha, Neb., willing to invest in the

project. The consultant assembled a

financing package that included lowinterest loans from a local bank and

developed an agreement that gave the

builders partial ownership of the project. The cooperative itself wound up

owning about a third of the business.

The ethanol distillery was designed

to produce 14 million gallons per year.

This is small for an ethanol operation,

and in the best of circumstances would

be more difficult to run profitably than

a plant with a 40-million-gallon capacity, considered the size at which

economies of scale are achieved. But as

it turned out, small capacity was only

part of the problem.

More research time needed

In retrospect, says Hesch, the co-op

should have done more research and

asked a lot more questions. But at the

time, the package seemed to be just

what they needed. Another factor

pushed them to hurry the project: the

need to get their ducks in a row before

they ran out of time. They had permits

and investors, but delays might cause

them to lose either one. “Closing loans

takes time,” he says, and the co-op

hadn’t realized just how much time it

would take. 

While the loan-making process

ground on, the necessary building permits threatened to expire, putting the

low-interest loans in jeopardy.

Construction work on the plant began

in October 2000, before the loan was

closed. A construction loan agreement

for $9 million was only signed seven

months later, on May 14, 2001; it took

another three months before funds

were released. 

With the funding in place, the coop’s troubles were not over. Problems

with construction resulted in cost and

time overruns. And when the plant

finally began operating, Tri-State had

another unwelcome surprise: its

ethanol distillery did not perform the

way it was supposed to. 

“If it were a car,” says Hesch, “the

fastest it would go would be 30 miles

Hard Lessons 

Tri-State Ethanol struggling to overcome difficult start

S
Rural Cooperatives / July/August 2004 33

Special Section > Co-ops and Biofuels

per hour, and it would break down

every hundred miles. The boilers were

wrong, and the way the pipes were

designed made sanitation very difficult.” According to other sources, the

plant was built around used machinery,

and its design was wholly inadequate

to produce ethanol at its nominal

capacity. 

Unable to operate the plant, TriState Ethanol was unable to generate

cash flow to repay its debtors. “They

told us orally that it would be a “turnkey” operation,” Hesch says, “but we

didn’t actually get it in print.” The

contract had details about “exceptions

and allowances,” he says, that made it

difficult to pursue action against the

builders and consultants for non-performance.

The construction company and a

subcontractor slapped mechanic’s liens

on the plant, and Tri-State Ethanol

LLC was forced to declare bankruptcy.

The ensuing legal disputes have been

complicated by the fact that the construction company is a part-owner of

the operation. It has been estimated

that it will take an additional $1.7 to

$3.4 million to make the plant fully

functional, including materials and

labor. 

Backers still hoping

for eventual success

Despite the venture’s tribulations,

Hesch is optimistic that Tri-State

Ethanol will eventually be successful.

The company has put together a

Chapter 11 bankruptcy plan, approved

unanimously by the shareholders,

under which, he says, all necessary

modifications will be made to get the

plant up and running and all debts will

eventually be satisfied. 

Others are less sanguine about the

operation’s prospects, saying it will

have to overcome its small size, a lessthan-ideal location and lack of a good

supply of natural gas. 

In any case, the co-op members and

others who helped finance the project

have learned some very hard, expensive

lessons. “We should have had more

checks and balances,” says Hesch. “We

thought we had checked out everything well, but so many things didn’t

pan out. We were left with ghosts and

shadows.” Hesch believes that much of

the trouble was caused by the time

constraints stemming from financing

problems. “If we’d had decent financing,” he says, “things would have been

different.” ■

“We thought we 

had checked out

everything well, 

but so many things

didn’t pan out. 

We were left with

ghosts and shadows.”
34 July/August 2004 / Rural Cooperatives

Special Section > Co-ops and Biofuels

Minnesota Soybean Processors MN $500,000 biodiesel Conduct feasibility studies evaluating soydiesel processing plant and

oil refinery, as well as identity-preserved-grain processing.

South Dakota Soybean 

Processors SD $500,000 biodiesel Study vertical integration of soybean meal, soybean hulls and crude

soybean oil. Applicant intends to focus on soydiesel, refined vegetable oil, polyurethane products and protein-concentrate products.

Pacific Rim Ethanol LLC WA $500,000 ethanol For construction of a 40-million-gallon-per-year fuel and industrialgrade ethanol and wheat gluten processing facility in central Washington.

Central Illinois Ag Coalition IL $60,000 ethanol Conduct a feasibility study for a grain ethanol facility. 

Midwest Grain 

Processors Cooperative IA $500,000 ethanol Working capital for operation of an ethanol plant in Kossuth County,

Iowa. The plant will use 16 million bushels of corn annually to produce 45 million gallons of denatured fuel-grade ethanol. 

Recipient State Grant Project Project Description

Amount Type

SDA Rural Development

is helping to stimulate

the rural economy by

providing matching

grants under its Value

Added Producer Grant program

(VAPG). Alternative energy projects —

including farmer-owned ethanol and

biodiesel plants — have been major

beneficiaries, as the table on the following pages shows. 

The VAPG Program was authorized

by the Agriculture Risk Protection Act

of 2000 and was amended by the 2002

Farm Bill. Grants may be used for

planning activities and working capital

for marketing value-added agricultural

products and for farm-based renewable

energy. 

Eligible applicants are independent

producers, farmer- and rancher-owned

cooperatives, agricultural producer

groups, and majority-controlled producer-based business ventures. 

The maximum amount that can be

awarded is $500,000, and all VAPG

funds must be matched by an equal

amount of funds from the applicant or

a third party. 

Applications for the 2004 program

closed on July 30, 2004. But interested

groups are encouraged to keep track of

details for the next round of funding

by periodically checking the VAPG

Web site at:

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

vadg.htm. About $13.2 million will be

awarded in 2004. 

For more information about the

program, please contact your USDA

Rural Development state office (contact information is included on the

VAPG Web site, or by calling (202)

720-4323, then entering “1” at the

voice prompt).

You may also contact the USDA

Rural Development national office in

Washington, D.C., through e-mail:

cpgrants@usda.gov, or by phoning

Marc Warman at (202) 690-1431, or

Gail Thuner at (202) 690-2426. ■

USDA grants support 

home-grown fuels

U

VAPG grants awarded for alternative energy projects,

2001-2003
Rural Cooperatives / July/August 2004 35

Special Section > Co-ops and Biofuels

Siouxland Energy & 

Livestock Cooperative IA $500,000 ethanol Working capital for ethanol plant expected to produce 14 million gallons of ethanol annually, as well as wet distillers grain, a high-energy animal feed.

Pine Lake Corn Processors IA $500,000 ethanol Working capital for startup costs of ethanol plant. The plant is

expected to produce 15 million gallons of ethanol annually, as well

as distillers grain for animal feed and supplements.

Quad County Corn Processors 

Cooperative IA $500,000 ethanol Working capital for the startup of an ethanol plant in west-central

Iowa. 

Hopkinsville Elevator Co., Inc. KY $500,000 ethanol Applicant will grind 7.3 million bushels of corn and produce 20 million

gallons of fuel-grade ethanol and 58,400 tons of distillers dry grains

annually.

Dakota Corn Processors 

Cooperative SD $401,704 ethanol Working capital for ethanol plant expected to purchase over 14 million bushels of corn and to produce 40 million gallons of ethanol

annually.

Iowa Soybean Promotion Board IA $77,000 biodiesel For feasibility study for using soybean oil as a base fuel to produce

renewable energy.

Garden State Ethanol NJ $219,000 biodiesel For feasibility study and developing a business plan for a farmerowned biorefinery, greenhouse and aquaculture facility.

Power Plus Technologies IA $500,000 biodiesel To assist in the startup of a biodiesel plant.

Mid-America Biofuels, LLC MO $450,000 biodiesel To establish a producer-owned biodiesel plant in Missouri.

Karlon Farms, LLC ID $65,000 biomass To complete feasibility study for using grain and grass straw for supplemental biomass fuel to generate electricity. 

Merrill’s Egg Farm ID $39,835 biomass To study feasibility of converting poultry waste into energy and creating carbon byproducts.

Cinergy Services, Inc. IN $50,000 biomass For feasibility study and business plan for biomass co-firing plant in

Indiana.

Cook Swine Farm MS $65,429 biomass To assess availability and feasibility of various bioenergy technologies for swine farmers.

K & G Farms MS $48,032 biomass To help Mississippi poultry producers find uses for litter generated

on farms.

Partners In Forestry WI $69,700 biomass For a feasibility study to help identify raw-product supplies and niche

markets for manufacturing, and to determine feasibility of biomass

energy from wood residue to power small electric generating plants. 

Charles Feenstra Dairy, LLC AZ $150,000 ethanol For a feasibility study for an ethanol and distillers grain plant in Arizona that would benefit 144 livestock producers.

Olathe Patato Growers 

Cooperative Assoc. CO $41,300 ethanol To evaluate viability of an ethanol plant and commercial feedlot operation in Western Colorado.

Golden Grain Energy LLC IA $74,000 ethanol To study feasibility of entering the emerging ethanol market.

Iowa Renewable 

Fuels Association IA $48,500 ethanol To support association’s marketing of ethanol and co-products.

Charter membership will consist of eleven farmer-owned ethanol

plants either in production or under construction.

Recipient State Grant Project Project Description

Amount Type
Special Section > Co-ops and Biofuels

36 July/August 2004 / Rural Cooperatives

Treasure Valley 

Renewable Resources ID $450,000 ethanol For help developing a 15-million-gallon-per-year, producer-owned

ethanol plant.

Greencastle/Putnam County 

Development Center, Inc. IN $54,500 ethanol To develop a business plan for establishing an ethanol plant.

Western Missouri Ethanol Trust MO $140,000 ethanol Trust will use grant to develop a marketing strategy and business

plan for a 30-million-gallon ethanol plant.

Dakota Renewable Fuels, LLC ND $167,500 ethanol To complete business development of a 30-million-gallon, dry-mill

ethanol plant.

Imperial Young Farmers 

and Ranchers NE $40,000 ethanol For feasibility study for a biomass ethanol and electric facility that

uses waste crops, such as corn stover and wheat straw.

Oklahoma Farmers Union 

Sustainable Energy L.L.C. OK $231,000 ethanol To determine feasibility and financial sustainability of a New-Generation co-op that will help grain producers use hulled barley for the

production of bioenergy products.

South Dakota Farmers Union SD $450,000 ethanol To study feasibility of producing ethanol from corn and processed

biowaste from the dairy industry.

Central Texas Ag Development TX $65,850 ethanol Feasibility study for an ethanol facility.

Farmers Cooperative Elevator 

Association of Levelland TX $249,658 ethanol To help grain elevator co-op construct ethanol plant. 

Green Virginia Ethanol Project VA $211,650 ethanol Feasibility study of ethanol production in a grain mill, or a cellulose

hydrolysis facility, in Virginia.

Virginia Farm Bureau Federation VA $44,750 ethanol To help establish an ethanol plant. 

Western Wisconsin 

Renewable Energy Co-op WI $65,000 ethanol For legal assistance related to the development of an ethanol plant with

a capacity of up to 40 million gallons annually.

Little Souix Corn Processors IA $450,000 ethanol A majority producer-owned business in Marcus, Iowa, will use grant

as working capital for startup of a 40-million-gallon-per-year ethanol

plant.

Big River Resources 

Cooperative (BRRC) IA $500,000 ethanol For working capital for startup of a 40-million-gallon-per-year ethanol

plant.

LincolnLand Agri-Energy IL $500,000 ethanol To help operate a producer-owned, 40-million-gallon -per-year

ethanol plant.

East Kansas Agri-Energy, LLC KS $450,000 ethanol To help build and operate a 20-million-gallon-per-year ethanol plant.

Western Plains Energy, LLC KS $290,615 ethanol To build and operate a 30-million-gallon-per-year ethanol plant near

Oakley, Kan.

Last Mile Electric Cooperative WA $150,000 wind energy To assess the feasibility of installing small-scale wind turbines on

farms in the Pacific Northwest.

Harvest Land Cooperative MN $148,000 wind energy To assist in the development of on-farm, wind-power energy. 

West Bend Elevator IA $30,500 biodiesel For development of a 5-million-gallon-per-year biodiesel production

plant.

Union County Biodiesel Company KY $25,225 biodiesel For a feasibility study and business plan for conversion of raw soybeans into soydiesel and soybean meal for animal feed.

Recipient State Grant Project Project Description

Amount Type
Special Section > Co-ops and Biofuels

Rural Cooperatives / July/August 2004 37

Hallock Cooperative 

Elevator Company MN $50,000 biodiesel For feasibility study and business plan for a biodiesel plant in northwest Minnesota.

Flick Seed Company MO $50,000 biodiesel For processing waste biomass material into alternative fuel.

Columbia County 

Farm Bureau, Inc. WA $50,000 biodiesel For feasibility study and business plan for growing and processing

oilseeds for biodiesel.

Blue Sun Producers, Inc. CO $450,000 biodiesel To help applicant increase membership base and to produce

oilseeds for premium biodiesel.

Farmers Union Marketing 

& Processing Assoc. MN $500,000 biodiesel For operation of a proposed, 2.8-million-gallon-per- year, continuous-flow biodiesel plant that will use animal fats and vegetable oils

from livestock rendering operation.

United Wisconsin Grain

Producers, LLC WI $450,000 biodiesel For feasibility study and business plan to assess the economic

potential of growing and processing oilseeds for biodiesel. 

Creative Horizons Producers IA $50,000 ethanol For expansion of existing ethanol facility and development of a

biodiesel plant. 

Putnam Bio-Products, LLC IN $25,250 ethanol To plan a bio-refinery to produce ethanol and other co-products.

Ethanol Grain Processors, Inc. KS $17,500 ethanol To update a feasibility study and develop a business plan for a proposed 30-million-gallon-per-year ethanol plant in Washington County.

Agriculture Marketing 

Institute, Inc. KY $79,900 ethanol For feasibility study and business plan for converting an existing

chemical plant into an ethanol facility. 

Barton County Ethanol Production 

Steering Committee MO $47,500 ethanol For establishing an ethanol plant that will use feedstock produced

in the area.

Co2 Ventures, LLC NE $128,000 ethanol To develop business applications for use of Co2 generated from

bioenergy processing facilities. 

NEDAK Ethanol NE $38,500 ethanol Feasibility study and business plan for ethanol plant. 

East Central Ag Products, Inc. MO $500,000 ethanol Working capital for a 20-million-gallon ethanol plant.

Husker Ag, LLC NE $226,850 ethanol For costs associated with 20-million-gallon-per-year ethanol plant.

KAAPA Ethanol, LLC NE $240,000 ethanol For working capital and to pay for production inputs for a 40-milliongallon, dry-mill ethanol plant in Minden, Neb.

Agricultural Producers’ Green

Attributes Maximization 

Steering Committee VT $101,920 other energy To study potential for sale of renewable-energy “green tags” and

greenhouse gas emissions reduction credits, independent of the sale

of energy/electricity produced by a renewable energy project.

Floyd County Wind IA $7,312 wind energy To study potential of generating electricity with wind-power in Floyd

County, Iowa.

Farm Energy, LLC IA $7,500 wind energy For feasibility study and business plan for a small-scale, producerowned wind farm in northwest Iowa.

Recipient State Grant Project Project Description

Amount Type
38 July/August 2004 / Rural Cooperatives

By Bruce J. Reynolds, Economist

USDA Rural Development

bruce.reynolds@usda.gov

Editor’s note: This article is the third in a

three-part series on selecting and compensating cooperative directors. The first article was published in the Nov.-Dec. 2003

issue, and the second part in the MarchApril 2004 issue. These and other past

issues can be accessed online at: www.rurdev.usda.gov/rbs/pub/openmag.htm. 

ervice on the board of

directors of cooperatives

involves a significant

commitment of time and

mental energy. Some

members who would make excellent

directors may not seek election to the

board because of these demands.

Financial recompense may offset the

reluctance of some members to serve

as directors.

Cooperatives of a similar type, business volume and geographic location

tend to adopt similar policies as to

method and amount of compensation

for directors. A recent survey identifies

differences in the amounts and terms

under which director compensation is

paid. The survey identified three general

types of financial compensation: (1) permeeting payment or per diem, (2) annual stipend or retainer, and (3) reimbursement of travel expenses. There were 419

responses to financial compensation

questions. Farm supply (205) and grain

(173) cooperatives were the predominant types of cooperatives that shared

compensation information. Several

large, high-value marketing cooperatives

also shared this information.

Only two of the surveyed cooperatives indicated that no compensation is

paid to directors. Travel expense is

often negligible for directors of local

cooperatives. Reimbursement is available in 247 out of 419 survey cooperatives. Twenty-five cooperatives cover

travel expenses but do not pay any additional compensation. Survey results for

per-meeting and stipend compensation,

but not travel reimbursement policies,

are summarized below. 

Compensation amounts are influenced by a cooperative’s volume of

sales. Responses are in three sales volume intervals: $2 million to $26 million; $27 million to $89 million; $90

million to $8 billion and for all respondents. The mode (the most frequently

occurring number), median and range

of compensation amounts, as well as

the number of cooperatives in each

sales-volume interval are summarized.

The 27 cooperatives without per-meeting or stipend compensation are

excluded from the calculations of the

summary statistics. 

Policies for directors and members

are established with an eye toward fairness and comparability with general

practices of other cooperatives. For

this reason, the mode — which measures the most frequent or common

value — is an especially relevant summary statistic. Furthermore, the

“mode count,” or number of observations represented by the mode, shows

the relative predominance of certain

compensation amounts. There are a

few cases of ties for the mode (bimodal

values), and several commonly used

compensation values are almost as frequent as the mode. In fact, compensation data are multi-modal in the sense

that there are different strings of identical per-meeting rates or stipend

amounts which cooperatives adopt.

This multi-modal distribution of 

compensation is displayed in stemand-leaf plots in an on-line report at

the NCR-194 Web site (http://www.

agecon.ksu.edu/accc/ncr194/).

Per-meeting compensation

A per-meeting payment applies for

each day of a meeting’s duration. Most

co-ops reported that their board meetings usually do not extend beyond one

day. Many cooperatives have variations

in the payment amount for half day or

for evening meetings. A few cooperatives mentioned that this payment was

only for meetings attended and was

Compensating co-op directors 

USDA study reveals wide range of pay plans

S A stipend recognizes

service beyond board

meetings, such as a

director’s role in

helping maintain a

co-op’s positive relations with members

and the public.
Rural Cooperatives / July/August 2004 39

therefore not automatic. Cooperatives

often have monthly board meetings,

but several have more than twelve

meetings per year, and for many co-ops

the number of meetings varies from

year-to-year. Therefore, annual compensation is variable for cooperatives

with a per-meeting payment policy.

The mode per-meeting rate is

$100 in the three sales groups. There

is a tie at $200 for the mode in the

larges sales class (Table 1). A double

asterisk (**) indicates bimodal values,

reported in a footnote to the table.

Also note that these per-meeting rate

summaries do not include higher

amounts that are often paid to officers of the board. 

The median is $75, as compared to

the mode of $100, which suggests that

per-meeting rates less than the mode

are also popular. In fact, 45 cooperatives paid $50 and 42 paid $75 permeeting, as compared to 63 paying

$100. Per-meeting compensation is

generally higher for directors of the 42

cooperatives in the sales range $90

million to $8 billion, as indicated by its

median of $150. 

Stipend

The term “stipend” describes fixed

annual payments as a method of compensation. Although stipends are often

paid-out monthly, the amount does not

change when greater or fewer meetings are held in any given year. This

method recognizes the fact that board

meetings are not the only occasions for

a director’s work. 

Director compensation with a

stipend or fixed annual payment is less

frequent than per- meeting payments,

with only 69 cooperatives reporting

this method for non-officers of the

board (Table 2). Several cooperatives

pay these annual stipends to their

directors monthly and others make a

single payment. A stipend recognizes

service beyond board meetings, such as

a director’s role in helping to maintain

a cooperative’s positive relations with

members and the public.

The stipend mode value is $1,200,

which is paid by 17 of the responding

cooperatives. The median stipend is

$900. Stipends of less than $1,000 are

paid to directors by 37 out of the 69

cooperatives having a fixed annual

compensation. Note that a $1,200

stipend is equivalent to the annual

compensation of cooperatives with a

per-meeting rate of $100 and monthly

board meetings. However, several

cooperatives with a per-meeting

method only pay for meetings attended, whereas those cooperatives with an

annual stipend, even if disbursed on a

monthly basis, pay their directors

regardless of meeting attendance. 

Compensation for board officers

Compensation is often higher for

officers of the board. Furthermore,

eight cooperatives provide compensation only to board officers. The 300

cooperatives with a per-meeting payment include 52 that also pay stipends

to board officers. For the 248 cooperatives that exclusively compensate with

a per-meeting payment, 79 have a

higher per-meeting rate for the board

chair than for other directors. The

median for the board chair is $100,

which compares to $75 per-meeting

paid to non-officers of the board

(Table 1). 

Eighty responding cooperatives pay

stipends to board chairs, which include

11 cases where they are not paid to

non-officer directors. In another 36

cases, chair stipends are higher than

the amounts paid to non-officer directors. The median stipend for the board

chair is $1,000, compared to $900 for

non-officer directors. 

Board secretaries are paid higher

per-meeting rates than non-officer

directors in 52 cases, with a median of

$95 as compared to $75. In addition,

board secretaries receive per-meeting

payments in 10 cases when either no

Table 2: Annual stipend for directors, reported for cooperatives in sales

ranges and in total, 2003

Sales range* Co-ops Mode Mode count Median Range

($ million) (No.) ($) (No.) ($) ($)

2 - 26 40 1,200 7 735 150 – 6,000

27 - 89 20 1,200 8 1,200 360 – 5,300

90 -1,880 9 ** ** 1,200 480 – 25,000

Total 69 1,200 17 900 150 – 25,000

* Total sales in 2001 as reported by cooperatives in the RBS annual survey. 

** A two-way tie of 2 responses for $600 and for $1,200.

Table 1: Per-meeting compensation for directors, reported for cooperatives in

sales ranges and in total, 2003

Sales range* Co-ops Mode Mode count Median Range

($ million) (No.) ($) (No.) ($) ($)

2-26 145 100 31 75 4 – 400

27-89 113 100 26 80 20 – 300

90-8,000 42 ** ** 150 10 – 700

Total 300 100 63 75 4 – 700

* Total sales in 2001 as reported by cooperatives in the RBS annual survey.

** A two-way tie for the mode between $100 and $200 with each having 6 responses.
40 July/August 2004 / Rural Cooperatives

such payments are made, or stipends

are paid, to non-officer directors. In

fact, eight of those 10 have a per-meeting payment exclusively for the board

secretary. 

Stipends for board secretaries are

higher than for non-officer directors in

28 cases. In addition, there are eight

cases where stipends are paid to board

secretaries but not to non-officer

directors. The median secretary

stipend is $930, compared to $900 for

non-officer directors. 

Combined compensation policy

Combined or mixed compensation,

i.e., paying both a per-meeting amount

and a stipend, was reported by only 15

cooperatives for all members of the

board, while 88 cooperatives apply this

policy exclusively to officers. These

variations for officers primarily apply

to the board chair and secretary.

Results for cooperatives with a mixed

compensation policy are summarized

in a more detailed report, available on

the NCR-194 web page. 

A combined compensation policy is

more exacting than necessary for many

cooperatives. Nevertheless, an examination of the 88 cooperatives with a

combined policy for officers reveals the

different economic purposes of permeeting payments vs. stipends that are

less evident when a single method of

compensation is used. 

When cooperatives provide higher

compensation for officers, the chair is

usually the highest compensated position on the board. Yet, cooperatives

with a combined policy more often use

a stipend to pay higher compensation

to the board chair than a higher permeeting payment. In contrast, a higher

per-meeting rate is more frequently

used to increase the compensation for

board secretaries. This difference may

reflect the fact that the added burden

of secretary work involves board meetings, whereas the chair not only has

more work in running the meetings,

but may also be involved in a lot of

member relations and public affairs

work. These kinds of services are often

difficult to track in terms of time spent,

so are more accurately compensated

with a stipend than a per-meeting rate. 

Compensating non-member directors

Farmer cooperatives usually have

members exclusively as their directors,

as indicated by the survey results

showing only 18 out of 437 with nonmembers on the board. Three of these

18 cooperatives were incorporated in

Virginia, where state statutes require

farmer cooperatives — under certain

conditions — to appoint a public

director. As discussed in the second

article of this series, several cooperatives were considering revisions in

their bylaws to allow appointment, if

not election, of a non-member to the

board. If cooperatives increasingly

decide to place non-members on their

boards, especially if such non-members

are professionals or business leaders,

the issue of paying higher compensation will arise more often. 

Only two of the responding cooperatives with non-members on their

boards reported compensation above

what is paid to member directors.

These cooperatives compete in highvalue commodity industries and their

non-member directors are selected for

the purpose of providing business

expertise that would unlikely be available from a board that included only

members. Each cooperative faces its

own set of challenges, and director

selection and compensation policies

must take such individual circumstances into account. 

Although it is not unusual for many

privately owned and publicly traded

companies to have the flexibility to

compensate directors differently, especially high-profile public figures, cooperatives operate with more constraining

business objectives. In cooperatives, the

emphasis on fair and equitable treatment gives some salience to the idea of

compensating member and non-member board members the same.

Board excellence

Policies for selecting, electing and

financially compensating cooperative

directors are the topics of this threepart series of articles. These topics all

relate to the goal in cooperative governance of getting the best directors possible to serve on the board. 

The payments to directors —

whether per-meeting, stipends or a

combination — are intended to be a

financial compensation for the extra

time and effort they give to their cooperatives. In many non-cooperative

businesses, directors often seem to

receive excessive compensation, as frequently reported in the news media.

For cooperatives, the challenge is far

more to ensure that director payments

are adequate, rather than one of keeping compensation in-check. 

Some survey respondents commented that even though they have policies

for director candidate selection and

encourage competition for board elections, a large proportion of members

are unwilling to consider serving on

the board. Such member reluctance

raises a question about the adequacy of

director compensation. 

The challenges of electing the best

directors possible involve diligence in

reviewing and updating governance

policies, attending conferences to discuss best practices and participating in

surveys that provide an opportunity for

the cooperative community to share

information. ■

If co-ops continue 

to place more nonmembers on their

boards, the issue 

of paying higher

compensation will

arise more often.
Rural Cooperatives / July/August 2004 41

Darneille new PCCA CEO 

Wallace L. Darneille, with 30 years

in the cotton industry, has been named

as president-elect and CEO of Plains

Cotton Cooperative in Lubbock,

Texas. Darneille succeeds Van May,

who will step down on Sept. 1. “We

are excited to have someone with

Wally’s depth of experience in cotton,”

says PCCA Chairman Eddie Smith.

“His background is a

very good fit

for this organization.”

Darneille spent

much of his

career with

Weil Brothers

Cotton and is

a former president of the

Texas Cotton

Association. He has a bachelor’s degree

from Dartmouth College and a MBA

from Auburn University. 

May has been president and CEO

since 1992, and Smith credited him for

helping the co-op “achieve unprecedented success.” During May’s years at

the helm, PCCA earned total net margins of $236 million

and $293 million was

paid to members in

annual dividends,

stock retirements and

mill option capital

retains. Smith also

praised May for his

efforts to modernize

the co-op textile

mills, which made big

gains in production

capacity and efficiency during his tenure while the diversity

and quality of denim was improved. 

Repayment demanded 

from Farmland bondholders 

It was a “run on the bank,” created

by bondholders demanding payment

from the co-op, that precipitated

Farmland Industries’ bankruptcy filing

in 2002. But now, in a final bitter irony

to the demise of what had been the

nation’s largest farmer-owned co-op,

those bondholders may have to give

much of that money back. 

The trust in charge of liquidating

the co-op’s assets is demanding repayment from any bondholders paid

within 90 days preceding the bankruptcy filing. Farmland had about

20,000 bondholders, many of them

small, individual investors. Because

Farmland was technically insolvent

when it made the payments to bondholders, they are entitled to only the

same portion of payment from the

estate as other creditors. 

An article in the Omaha WorldHerald cites the example of one

bondholder — a retiree who was paid

$10,000 for his bond before the co-op

filed for bankruptcy — who has

received legal notice demanding repayment of the entire amount plus $220 in

interest. It also reports that FI Liquidating Trust is giving some bondholders the option of repaying a smaller

percentage of their bond value if they

forgo any future claims against the

estate. One attorney representing a

group of the bondholders said most are

being asked to repay $15,000 to

$35,000, but some owe as much as

$400,000. 

Tuscarora Organic Co-op expands

Tuscarora Organic Growers

Cooperative has opened a new, 3,600-

square-foot addition to its warehouse.

Since forming in 1988, the co-op’s output has increased 30-fold. So, the

Huntingdon County, Pa., co-op decided to invest $180,000 for the badly

needed warehouse expansion, as well as

for new coolers and information technology upgrades. Funding included a

$65,000 loan from the Progress Fund,

which in turn received $750,000 under

the USDA Rural Development

Intermediary Relending Program. The

state Small Business First Loan

Program also provided $75,000 for the

project, while growers invested

$40,000. The bulk of the co-op’s products are shipped to specialty stores and

restaurants around Washington, D.C.,

while others go to farmers markets and

roadside stands that appeal to tourists

in southern Pennsylvania. 

Turkey growers form co-op

to pursue plant purchase

By an overwhelming vote of 144-7,

turkey growers in Virginia and West

Virginia have opted to from a co-op to

pursue possible purchase the Pilgrim’s

Pride poultry processing plant in

Hinton, Va., which they currently supNEWSLINE

Compiled by Dan Campbell

Send items to: dan.campbell@USDA.gov

Swiss Valley Farms has given a “facelift” to a number of its

products, including this line of fruit drinks, to “create more eye

appeal for kids.” The Davenport, Iowa, co-op has also introduced a new flavor, blue raspberry, to capitalize on the popularity of blue drinks among youth. It has also launched a new,

more convenient size and packaging for its string cheese. Photo

courtesy Swiss Valley 

Wallace L. Darneille
42 July/August 2004 / Rural Cooperatives

ply. The plant, which processes 8 million birds for the fresh market annually, has announced plans to close on

Oct. 1 if a buyer isn’t found. The plant

employs 1,300 and has contracts with

169 farmers. The Washington Times

cites data showing that a plant closure

would cost the area up to $225 million

in economic activity annually. Pilgrim’s

Pride, based in Pittsburg, Texas, is

reportedly closing the plant to concentrate more on ready-to-eat deli meats

and “heat-and-eat” products. 

Gold Kist eyes possible conversion

Gold Kist Inc.’s board has approved

a proposal to convert Gold Kist into

an investor-owned corporation. The

members of the co-op will be required

to approve the conversion. The co-op

anticipates holding a member election

on the conversion in the second half of

August. But the precise dates of the

next set of grower meetings and the

voting period will depend on the

Security Exchange Commission’s

review of the Gold Kist filings. 

If approved, Atlanta-based Gold

Kist would complete the conversion by

merging into a new corporation, Gold

Kist Holdings Inc. An initial offering

of 18 million shares of common stock

is being eyed. The proceeds of the

stock sale would provide payments to

members, and would repay more than

$70 million in senior debt and for general purposes. 

Gold Kist is the third largest integrated broiler company in the United

States, accounting for more than 9

percent of the nation’s chicken broiler

meat. Gold Kist’s broiler production

operations include nine broiler complexes located in Alabama, Florida,

Georgia, North Carolina and South

Carolina. It employs approximately

16,000 people and contracts with about

2,300 family farmers who produce 14

million chickens per week. Its products are sold both under the Gold Kist

Farms brand name and under supermarket private labels. 

For the nine months ending March

27, the company reported net margins

of $56.7 million, compared to a net

loss of $66 million for the same period

last year. Sales for the same period

were $1.62 billion, compared to $1.36

billion for the first nine months of

2003. 

Organic Valley sponsors 

“swim for clean water”

The first-ever swim of the entire

length of the Hudson River is being

sponsored by Organic Valley Family of

Farms, America’s leading organic farmers’ cooperative, as part of its ongoing

effort to heighten awareness of the link

between clean water and organic agriculture. Christopher Swain, 36, an

award-winning advocate for clean

water, was to swim 315 miles down the

river through class IV rapids, raw

sewage and pesticides before stroking

past Manhattan, around the Statue of

Liberty and out into the Atlantic

Ocean in late July. 

School visits, on-line teaching tools

for K-12 educators (at www.swimforcleanwater.org), a visit to the New York

State Legislature in Albany, community

clean-ups and farm visits are all part of

the intensive educational program supporting the swim. “Since the Clean

Water Act passed in 1972, the Hudson

has come a long way,” says Swain. “But

if we ever want to see the Hudson

become a pristine stream, everyone in

the watershed will need to make a few

river-friendly choices each day.”

Organized in 1988, Organic Valley

cooperative achieved record success in

2003 both in sales (up 25 percent to

$156 million) and in farmer recruitment (up 23 percent to 633 farmers).

Co-op members now farm 95,000

acres and milk 20,500 cows. Organic

Valley brand milk is now the top-selling organic milk in both mainstream

supermarkets and natural foods outlets

along the Eastern seaboard. 

Iowa Premium Pork

to operate in Le Mars 

The Iowa Premium Pork cooperative is leasing a vacant packing plant in

Le Mars, Iowa, where it will process

value-added pork products. The co-op

will contract through Sioux-Preme

Packing Co. in Sioux Center, Iowa, to

slaughter its hogs, from where the carcasses will be shipped to Le Mars for

further processing. The plant is

expected to employ about 50 workers.

Producer meetings were slated in June

to solicit an additional $400,000 in

equity investments. About $2.1 million

has already been invested by 102 producers. The plant will be operated by

Majestic Food Group, a wholly owned

subsidiary of the co-op, which has a

two-year lease on the plant with an

option to buy it at the end of that

period.

ACDI/VOCA names

Baker interim president 

Christopher Baker has been named

interim president and CEO of

ACDI/VOCA, which promotes international cooperative and economic

development. Baker, a 25-year veteran

of international economic development

work, grew up in Cuba and spent

seven years as CEO of the World

Council of Credit Unions, during

which time he is credited for helping

the organization to improve cost efficiencies and rebuilding its financial

reserves. He has also chaired the overseas Cooperative Development

Organic Valley is sponsoring Christopher

Swain’s Hudson River swim to call attention to the need for clean water. Here,

Swain on an earlier swim on the Columbia

River. Photo courtesy Organic Valley
Rural Cooperatives / July/August 2004 43

Council and the Committee for the

Promotion and Advancement of

Cooperatives. Baker will serve for a

three-month term, which can be

renewed for an additional three

months while ACDI/VOCA seeks to

define its future direction. 

New Sacramento nonprofit 

to promote cooperatives

Synergetic Enterprise Development

Group (SEDG) is a new, nonprofit

organization formed to promote cooperatives as a way to meet a broad array

of future needs in California. The

Sacramento-based business will work

as a catalyst for co-op projects. “Our

goal is to focus the resources available

to us to create new cooperative solutions,” says Lee Ruth, SEDG president. “We intend to strengthen relationships between existing cooperatives, aid in the creation of new models

and new legal forms of cooperatives

and strengthen the working bonds

between cooperative professionals.”

The SEDG board has already

approved two projects, including

development of a “California Snacks”

student cooperative, which it is hoped

will serve as a prototype for use on

school campuses statewide. It will kick

off Aug. 20 during the California State

Fair. Fairgoers will be able to purchase

California-grown fresh foods, nuts,

dairy products, vegetables and juices

while students will gain valuable experiences in learning how to operate a

similar business enterprise on their

own campuses. 

The second project will be the creation of a business plan for an agricultural biomass bargaining cooperative,

allowing farmers to profit from the

transformation of farm waste products

into a supply of electricity. “While

these first two projects are based in

agriculture, the intent of our diverse

board is to promote cooperatives as

solutions in all sectors of California

society,” Ruth says. Other SEDG officers include: Vice President Alan

Zepp, Northern California Power

Agency; Secretary Kim Coontz, 

Yolo Mutual Housing Association;

Treasurer Casey Garten, CoBank; 

and Legal Counsel Dan Best, Certified

Farmers Markets of Sacramento. 

For more information, phone (916)

457-6529.

Farmland’s share of feed,

agronomy ventures sold 

Land O’Lakes Inc. has signed an

agreement to purchase all of Farmland

Inc.’s ownership interest in Land

O’Lakes/Farmland Feed LLC. Under

the proposed agreement, LO’L would

pay just over $12 million to acquire

Farmland’s 8 percent interest, giving it

100 percent of the animal-feed joint

venture formed in 2000. The sale is

contingent upon bankruptcy court

approval in the Farmland case. 

Meanwhile, CHS Inc. has completed the purchase of Farmland

Industries’ ownership share of

Agriliance LLC, a leading supplier of

agronomic inputs in North America.

The purchase was approved April 20

by the U.S. District Court overseeing

Farmland’s bankruptcy. CHS now

owns 50 percent of the economic and

governance interests of Agriliance,

with the remaining 50 percent owned

by Land O’Lakes. CHS purchased

Wilbur Ellis Co.’s interest in

Agriliance in May 2003. Agriliance is a

major supplier of crop production

inputs and provider of agronomic

training for dealers across North

America. It reported sales of $3.5 billion in 2003. 

AMPI to close Glencoe plant 

Shrinking Midwest milk volume has

led Associated Milk Producers Inc.

(AMPI) to close its Glencoe plant,

effective June 19. “Though AMPI

market share has grown, Midwest milk

volume continues to shrink,” AMPI

General Manager Mark Furth says.

“AMPI will redirect the Glencoe milk

to maximize the efficiency of its other

plants. This will benefit all AMPI

members, including those shipping to

the Glencoe plant.”

AMPI acquired the Glencoe facility

through a merger with the Glencoe

Butter and Produce Association in

1999. Although AMPI upgraded the

cheese and whey processing equipment, Furth said the plant remains

small by industry standards. The

Glencoe facility is one of 13 AMPI

plants, of which five are located in

Minnesota. AMPI is working with the

30 employees of the Glencoe facility

to find new employment, including

positions in other AMPI manufacturing plants. Member services such as

milk testing and hauling will not be

affected.

AMPI has 5,000 members who

annually market more than 5 billion

pounds of milk. Members represent

dairy operations located throughout

Wisconsin, Minnesota, Iowa,

Nebraska, Missouri, South Dakota 

and North Dakota. 

Decatur to lead FCL 

CoBank has announced the

appointment of Steven Decatur as the

new president of Farm Credit Leasing

Services Corporation (FCL), which

provides leasing services to agricultural cooperatives, producers and

communications and energy companies nationwide. “Through Steve

Decatur’s

experience in

leasing and

commercial

banking, as

well has his

proven leadership skills,

we believe

FCL will

further

enhance

operations,

offerings and ongoing customer relationships,” says CoBank CEO Doug

Sims. Decatur brings with him nearly

30 years of experience in leasing, lending and financial services, and has successfully led initiatives to improve new

business prospects and profitability.

Prior to joining CoBank/FCL, he was

president of Marshall Bank in

Minneapolis and CEO of Marquette

Equipment Finance, a leasing company in Wayzata, Minn. 

Steven Decatur
44 July/August 2004 / Rural Cooperatives

Select Sires adds dairy 

breeds to product line

Jersey and Brown Swiss genetics are

popular crossbreeding choices among

some dairy producers, but other breeders are looking for specific traits not

found in those breeds. To accommodate this, Select Sires has added three

new dairy breeds to its lineup, which

include Montbeliarde from France,

Norwegian Red from Norway and

Swedish Red from Sweden. Select

Sires is working in cooperation with

Creative Genetics of California Inc. to

make the new offerings. 

“While crossbreeding is not for

everyone, some producers are trying it

as a way to take advantage of the

strengths from several different

breeds,” says Chuck Sattler, Select

Sires vice president for genetic programs. “In theory, crossbreeding can

provide a boost to profitability if producers can identify several breeds that

meet their requirements and then utilize them as part of a planned and

organized breeding program.” Based in

Plain City, Ohio, Select Sires Inc. is a

federation of 10 farmer-owned and -

controlled cooperatives.

USDA launches renewable

energy pilot project

Agriculture Secretary Ann M.

Veneman has announced a new guaranteed loan pilot project aimed at

developing renewable energy systems

from the use of livestock as a raw

material. “This program will provide

guaranteed loans for rural small businesses to develop the means to effectively destroy these specified risk materials from cattle while providing a biobased source of energy,” Veneman said. 

In January, USDA expanded the list

of specified risk materials prohibited in

the food supply as an additional firewall to prevent bovine spongiform

encephalopathy (BSE). In addition, the

U.S. Food and Drug Administration

announced that it intends to prohibit

specified risk materials in food regulation by the agency. 

The maximum amount of total loan

guarantees under the pilot program

will be $50 million. USDA anticipates

up to three awards will be made.

There is no dollar restriction associated with any one award, within the

budget allotment. The amount of the

loan guarantee cannot exceed 50 percent of the total project cost.

Applicants must submit their application and one copy to the USDA Rural

Development state office where the

proposed project is located, or where

the borrower is headquartered. The

notice of funding availability appeared

in the May 18 Federal Register. All

applications must be received by

August 16. 

To contact to your USDA Rural

Development state office for more

information, call (202) 720-4323 and

enter “1,” or visit the Web site:

www.rurdev.usda.gov.

Home health care co-ops 

get $1 million USDA boost

Agriculture Secretary Ann M.

Veneman has announced the selection

of nine recipients to receive a total of

$1 million in rural development community development initiative grant

funds to support the establishment and

operation of home health care cooperatives. “The development of rural

home-based health care cooperatives

provides a cost-effective means of providing elderly and low-income families

an alternative to health care services

available to them,” says Veneman.

“Through partnerships, the Bush

administration is working to improve

the quality of life for rural residents.” 

Pre-development grants will assist

qualified public bodies or nonprofit

community development organizations in providing outreach to homebased health care providers, assessing

local-level human service provider

needs and other activities leading to

the organization and implementation

of successful home-based health care

cooperatives. Revolving fund grants

are made to qualified, nonprofit community development organizations or

public bodies to provide start-up and

operating funds and technical assistance to the newly created, homebased health care cooperatives.

Recipients are required to obtain

matching funds, doubling the value of

the USDA grants. Eligible applicants

must be located in rural areas with

populations of 50,000 or less. Funding

of selected applicants will be contingent upon meeting the conditions of

the grant agreement. 

For more information, including 

a list of all grant recipients, visit:

http://www.usda.gov/Newsroom/

0196.04.html.

Innovative practices focus of

Missouri co-op conference

Many cooperatives are at the forefront of agribusiness innovation as

they strive to find new ways to

remain competitive while still continuing to meet the needs of their members. Cooperatives are, for example,

leaders in the renewable energy sector where they are helping farmers

capture the full rewards of new market opportunities. Recent changes in

state laws allow unprecedented

prospects for the evolution of the

cooperative model. These efforts will

be the focus of the seventh annual

Farmer Cooperatives Confe-rence,

Nov. 1-2 in Kansas City, Mo.

Cooperative Innovation is the title

of the event, to be held at the

Fairmont of Kansas City at the Plaza.

It will feature cooperative leaders who

have successfully initiated novel business approaches within their organizations or helped start new ventures.

More than 150 cooperative board

members, managers and cooperative

scholars are expected to attend. The

conference is sponsored by the

University of Wisconsin Center for

Cooperatives, which established the

conference in 1998 with the objective

of providing co-op directors, managers, government and academia with

information on major trends and

issues impacting agricultural cooperatives. For more information, visit the

conference website:

http://www.wisc.edu/uwcc/

farmercoops04/index.html, 

or e-mail Ashwini Rao at:
Rural Cooperatives / July/August 2004 45

rao@aae.wisc.edu, or call her at

(608) 262-3382. 

Rural credit program 

achieves mission in Russia

ACDI/VOCA’s Mobilizing

Agricultural Credit (MAC) program

ended in June after six years of success that some doubted was possible.

The project’s legacy is the Rural

Credit Cooperation Development

Fund and 47 accredited rural credit

cooperatives which, together, are the

backbone of a robust private rural

credit system that has already disbursed $24 million in loans.

ACDI/VOCA representative Fred

Smith came up with the idea, and

spent two years working with USDA

and USAID to secure initial funding.

While there were many skeptics,

ACDI/VOCA demonstrated that lending to Russian farmers could be profitable and that farmers would borrow

and repay at market interest rates.

ACDI/VOCA subsequently received

four cost extensions from USAID to

expand the project. There are now

more than 570 rural credit cooperatives (RCC) serving 50,000 members

in Russia. Of these RCCs, 205 are

members of the Union of Rural Credit

Cooperatives. Since 1998, the number

of RCCs has increased 12 times and

membership by 50 times.

Co-op Month activity to focus

on contributions to communities 

Cooperatives nationwide will highlight economic and charitable contributions to their communities under

plans for the annual observance of

National Co-op Month in October.

Using the theme “Cooperatives:

Owned by Our Members, Committed

to Our Communities,” the National

Cooperative Month Planning Committee will encourage local co-ops 

to stress community involvement,

employment and other identifiable

community contributions in their celebrations and observances for the

month, observed annually since 1930.

The co-op month committee will

develop materials to help co-ops at the

local level promote their community

and member commitments. An electronic toolkit of materials should be

available by early August — including

an updated logo, advertisements, fact

sheets, draft news releases and letters —

on the Web site: www.co-opmonth.coop.

■

growth of the business so that there was

adequate commodity product to meet

processed-flour demand. The cooperative must ultimately produce its own

commodity and at a stable price. There

is no guaranteed backup market supply. 

Warren and the board understand

the need to balance its supply with market demands. In its attempt to increase

membership and commodity supplies, if

too much money is paid up front to the

producers for millable seed, then the

price for finished MontinaTM valueadded products may exceed what the

market will bear. 

Since the board sets the price for

delivery rights for Amazing Grains

members, continuous dialogue and

market evaluation are vital. The co-op

continuously monitors and evaluates

changes in markets. 

VAPG funds bolster

co-op marketing efforts 

VAPG money was used for an advertising program to develop a close relationship with customers suffering from

Celiac. Warren has asked what they

look for in products and how the co-op

can gain their confidence in MontinaTM

products. New product ideas have come

from these talks. 

The VAPG has supported marketing

trips to Celiac conferences to learn more

about people afflicted with the condition

and to familiarize these people with

Amazing Grains. Amazing Grains will

ensure that there will be no question of

whether its products are truly “glutenfree.” The standard it uses for gluten

testing is 10 times more stringent than

the FDA standard. 

The co-op is assessing how to grow

and in what direction. It has come a

long way from the initial exposure to

academic and scientific research and it

has taken many committed public and

private partners to make this business

what it is today. USDA’s Value-Added

Producer Grant was the right tool at

the right time for this business. It provided a resource to fill in gaps existing

in the business development process.

■

Amazing Grains! continued from page 9

improve their future designs.”

With the plant in operation, the

original goal of the co-op seems to

have been fulfilled: the comparative

local price for corn has risen significantly. And while some ethanol operations may be experiencing difficulties

because of the general rise in grain

prices over the past year, Glacial Lakes

Ethanol has benefited from futures

positions it took earlier. 

In any case, member farmers sell

their corn to the plant even when they

can get a couple of cents more per

bushel elsewhere. “I didn’t think it

would happen,” says Branhan, “but

people around here feel like they have

real ownership of this operation.” 

It’s that local ownership that has

made the difference for Glacial Lakes.

■

Community investments helped launch plant continued from page 21
46 July/August 2004 / Rural Cooperatives

In other cases, growers increased

their production with the idea that they

each had to sell a larger quantity at the

lower price to make the same profit.

This domestic overproduction, however, made it harder to conclude that

imports contributed importantly to the

price decline. 

Price declines caused by 

imports, or overproduction?

TAA petitioners have also been confronted with the challenge of establishing that their prices were declining

from imports of similar or directly

competitive products. When imports

consist of a processed product, the

petitioner is required to show how it

significantly contributed to the decline

in the price of the raw commodity produced by the petitioner. In some cases

this has been hard to demonstrate,

especially when the raw commodity is

used in multiple ways.

A large California cooperative

looked at the program, evaluated the

odds that benefits could be obtained

for its members and decided against

applying. In such cases, co-ops need

to weigh the cost of pursuing TAA

help vs. the number of growers that

could benefit from it, and the likelihood of success, FAS advises. In this

case, five determined growers got

together in February and filed a petition on their own that FAS accepted.

Upon review, however, the petition

was denied because the price decline

was found to have resulted from

domestic overproduction rather than

import competition.

Once FAS certifies a petition, eligible producers of the commodity in the

effected geographic region have 90

days to apply for technical assistance

and cash benefits. USDA FSA county

offices (often located in USDA Service

Centers) can help producers prepare

and submit their applications.

Technical assistance under the program can provide access to a wide variety of resources from USDA’s

Cooperative State Research,

Education, and Extension Service

(CSREES), in partnership with a county Extension service. Farmers will

receive information regarding the feasibility and desirability of substituting

one or more alternative commodities

and assistance with improving the

competitiveness of the production and

marketing of the adversely affected

commodity.

To qualify for a TAA cash payment,

producers must complete Form FSA229, receive technical assistance from

the Extension Service and submit supporting documentation by September

30. If an applicant has already received

$10,000 in TAA benefits, or $65,000 in

counter-cyclical payments for the year,

reported an increase in net farm or

fishing income in the most recent tax

year, or has an annual adjusted gross

income greater than $2.5 million, he

or she is disqualified from receiving a

TAA cash payment. 

The amount of cash payment will

be equal to the quantity produced in

the most recent marketing year multiplied by the approved payment rate.

The payment rate is one-half the difference between the average price in

the most recent marketing year and 80

percent of the average price for the

five preceding marketing years.

Maine growers’ petition 

for blueberries certified

Last January, a petition from Maine

wild blueberry growers was the first to

be certified. Wild blueberries grown in

Maine have been facing stiff import

competition from those produced in

Canada’s eastern provinces. Prices had

been so low that some growers were

afraid for their industry. One grower

commented that he could not even

afford to fertilize his crop. 

A team of Extension specialists put

together a technical assistance curriculum for the wild blueberry growers and

initiated an education effort. A payment rate of 2.8 cents per pound was

established. The grower price of

Maine wild blueberries in the petitioned year of 2002 was 28 cents. 

The average price in 1997-2001 was

42 cents. Eighty percent of this fiveyear average was 33.6 cents. The difference between 80 percent of the fiveyear average price and the petitioned

year price was 5.6 cents. The payment

rate is half of this figure, or 2.8 cents

per pound.

Prior to the anniversary of its original certification, FAS must determine annually if trade and economic

conditions justify a petition’s renewal.

FAS will begin evaluating the

approved fiscal year 2004 petitions

for recertification in fiscal year 2005.

Free-rider issue arises

When does it make sense for a

cooperative to petition for adjustment

assistance? Cooperatives and associations submitting petitions should be

aware that all certified growers in a

state or production region are equally

eligible to receive benefits, regardless

of their membership or participation

in the organization preparing the

petition. 

The work required in submitting a

petition may be quite high for one, or

even a few growers, when the imports

are not the same raw commodity produced by the growers. It sometimes

makes sense for some representative

association of growers to petition for

TAA. 

Where a cooperative has a large

enough membership of prospective

growers and a trade association is

either not organized or is lacking in

ability or willingness to manage the

petition process, it may present an

opportunity for a cooperative to provide one more service for its members. 

There are six wild blueberry cooperatives in Maine with members who

benefited from the work of the petitioning trade association — the Wild

Blueberry Commission of Maine. One

of those cooperatives may well have

been the next most logical candidate

for preparing that petition. ■

Trade adjustment assistance continued from page 5
Rural Cooperatives / July/August 2004 47

longer restricted to the requirement

that its members be farmer-producers.

Now MCP could, for example, have as

one of its members a multi-billion-dollar multinational corporation. 

The change was enormously beneficial to the former cooperative’s balance

sheet. With a few strokes of a pen,

ADM changed from a $120 million

creditor to a 30 percent partner. The

LLC also re-valued its stock to $1.02

per share. 

On April 22, 2002, a team of legal

and financial experts from New York

and ADM headquarters flew in to

attend a regularly scheduled board

meeting. Ethanol and fructose prices

were on the agenda, but this meeting

turned out to be anything but routine.

A month earlier, ADM had tendered

an offer to purchase MCP outright.

And, according to press reports, Dan

Thompson, MCP’s CEO, presented

ADM’s offer to the board. 

According to directors quoted in the

Star Tribune, there were implications

and vague threats of lawsuits issued to

any director who might publicly voice

opposition. Each board member was

reportedly asked point blank if he or

she had hired legal representation or

discussed any financial details prior to

this meeting. Several directors have

said the atmosphere of these meetings

was one of intimidation and coercion. 

Golden parachutes

Some co-op members have said

“sweetheart payments” to executive

staff greased the wheels for ADM’s

takeover of MCP. A reported $8.5 million was to be awarded at sale to

MCP’s executives, and the amount was

doubled if the sale went through by a

specified date. A total of $20 million in

accelerated pensions was to be divided

among eight management-executives,

and the balance of his annual salary of

$385,000 was to be paid immediately

to CEO Thompson when the merger

went through, according to Minnesota

Public Radio reports. 

The board voted 19-5 in favor of

bringing the decision to sell MCP to

ADM to the membership for a vote.

Under the terms of the sale, ADM

agreed to purchase individual shares of

MCP stock for $2.90 per share, a total

of $396 million. ADM also agreed to

assume MCP’s remaining debt of $240

million. 

The shareholders voted conclusively, 3,825 to 736 (a super-majority of 83

percent of voting members) in favor of

the sale. The enterprise value of the

sale was about $760 million, based on

the cash amount, the 30 percent equity

already owned by ADM and the

agreed-upon debt assumption. 

Antitrust concerns were raised by

the merger of the No. 1 and No. 2

producers of ethanol and high fructose

corn sweeteners. But in July 2003, the

Department of Justice ruled in favor of

the sale with the provision that a jointventure with Corn Products International was to be dissolved. 

Some Minnesota lawmakers,

angered that the state had provided

$33 million in ethanol-producer subsidies to MCP, only to watch ADM

acquire it, demanded a refund. At last

account, however, no one was sure

about what recourse, if any, the state

might have. 

New Age co-op had age-old problem

Incentive payments aside, the

biggest reason to sell MCP may have

been even more fundamental. Given

the cooperative’s near-death experience

in 1997, its heavy debt burden and its

struggle to return patronage to members, it’s easy to appreciate that some

members might be having second

thoughts regarding their investment. 

Moreover, the secondary market in

MCP shares, by all evidence, was

indeed non-existent — a detail duly

noted among a majority of the stockholders that were at, or approaching,

retirement age. Because of the restriction that stock had to be sold to members, existing or potential, any member

seeking to cash out of the cooperative

had to be especially resourceful. 

First, that member had to find

another stockholder who was willing to

purchase his or her equity at current

prices, which meant that the buyer

wasn’t actively planning his or her own

retirement. Or the seller had to find a

non-member seeking membership who

also had the wherewithal to make the

purchase in such cash-strained times. 

Under the economic circumstances

of recent years — low corn prices and

large indebtedness — finding prospective members both willing and able to

buy into the cooperative was difficult

at best. Many members had even borrowed the capital to buy into MCP. 

Thompson put it this way to

Minnesota Public Radio: “A lot of

members in their 50s invested in this

company. They can’t sell their stock:

there’s no liquidity. Now they’re 75

years old...and they want to cash out.

They need cash for retirement purposes and have no way to do it.” 

MCP members shared these circumstances: their per-member investment was substantial, at least $10,240;

some had invested hundreds of thousands of dollars; they were in a ‘cooperative’ with a closed-membership policy; very few of the member firms were

legally incorporated; there was a large

membership and ownership transfer,

either intergenerational or otherwise,

was relatively prohibited. 

MCP’s situation met all the conditions for an extreme horizon problem. 

Despite the questions raised by the

way the board meeting was handled,

directors were under pressure to

increase cash flow to members. They

had the choice of speeding up equity

retirement programs — which would

result in a whole new set of problems

— or liquidating the cooperative’s

assets in whole or in part. The sale to

ADM was therefore, an extreme case

in which the tendency to emphasize

current cash flow at the expense of

future earnings was fulfilled by total

liquidation of the firm’s assets.

Some leaders of other Midwest

ethanol cooperatives say they look at

the MCP experience as a cautionary

tale of what can go wrong, and that

they hope to avoid a similar fate. ■

Lost Horizon continued from page 25
48 July/August 2004 / Rural Cooperatives

United States

Department of Agriculture

Washington, DC 20250

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