Rural

COOPERA COOPERATIVES

USDA / Rural Development July/August 2005

Greener Pastures

Farmer/consumer alliance boosts beef sales page 8

Small dairy co-ops looking to branded cheese page 12

Greener Pastures

Farmer/consumer alliance boosts beef sales page 8

Small dairy co-ops looking to branded cheese page 12
2 July/August 2005 / Rural Cooperatives

Editor’s note: Guest commentary for this

issue was written by Jean-Mari Peltier,

president and CEO of the National

Council of Farmer Cooperatives (NCFC).

It is based on a statement she submitted

in July to the Antitrust Modernization

Commission (AMC). The opinions

expressed are her own, and do not necessarily reflect those of USDA or its employees. The AMC, created by Congress to

review U.S. antitrust laws, announced this

spring that it would review the limited

antitrust immunity offered by the CapperVolstead Act, among other agriculturerelated statutes. 

The Capper-Volstead Act is the cornerstone of farmer cooperative law and

enables farmers to join together to

cooperatively process and market their

products. Without Capper-Volstead,

America’s farmers and ranchers would

lack any real bargaining power in an

economy increasingly dominated by a

few large buyers.

Farmer cooperatives enable agricultural producers to: 

• Derive more of their income from

the marketplace; 

• Take advantage of value-added

opportunities; 

• Better manage the risk inherent in

production agriculture and

• Compete more effectively in the

global marketplace. 

Congress has a long history of recognizing the need of farmers to be able

to form cooperatives, and has

expressed its desire to promote these

associations of producers through the

Clayton Act, the Capper-Volstead Act,

the Agricultural Marketing Act and the

Agricultural Marketing Agreement

Act. Such statutes are also vitally

important for the benefit of producers

as well as consumers.

There is no need to repeal or sunset

the limited antitrust immunity in the

Capper-Volstead Act because effective

limits on its application already exist.

For instance, the Act already gives the

secretary of agriculture authority to

review and protect the interests of all

parties, including consumers. 

Farmer cooperatives and their

members form a cornerstone of U.S.

agriculture and rural America. They

improve the economic well-being of

their members, provide jobs and leadership in their local communities and

help meet the food and fiber needs of

consumers both in the United States

and around the world. 

NCFC strongly urges that the AMC

recommend that the limited antitrust

immunities and the historical protections for farmers found in the CapperVolstead Act be maintained. We are far

from alone in taking this stand. Other

farm organizations that have offered

testimony in support of CapperVolstead include: the American Farm

Bureau Federation, National Milk

Producers Federation, Farm Credit

Council, National Farmers Union,

National Grange and 16 state and

regional farmer cooperative councils. 

Additionally, the co-chairs of the

Congressional Farmer Cooperative

Caucus —Senator Larry Craig (R-ID),

Senator Blanche Lincoln (D-AR),

Representative Sam Graves (R-MO),

Representative Earl Pomeroy (D-ND)

— have sent a letter to the Commission voicing strong support of maintaining the historical protections provided by the Capper-Volstead Act.

NCFC has also joined the Joint

Export Trade Alliance in support of

the Export Trading Company Act and

the Webb-Pomerene Act, two other

provisions singled out by the Commission for study.

The AMC has scheduled a hearing

on exemptions and immunities, which

include both Capper-Volstead and the

Ag Marketing Act, for Thursday,

November 3. Exact time and location

has yet to be announced at the time of

this writing. Additional information

can be found on the AMC Web site at:

http://www.amc.gov. Comments can be

sent to either comments@amc.gov or

by mail to Antitrust Modernization

Commission, 1120 G St., NW, Suite

810, Washington, D.C. 20005.

Capper-Volstead has played a critical role in making the United States

the world’s leading agricultural nation,

and will continue to pay dividends for

all Americans in the years ahead. 

— Jean-Mari Peltier, 

President & CEO

National Council of 

Farmer Cooperatives 

NCFC is a national association representing America’s farmer cooperatives. There

are nearly 3,000 farmer cooperatives

across the United Sates whose members

include a majority of our nation’s more

than 2 million farmers, ranchers and

growers.

COMMENTARY

Defending the cornerstone of cooperation

Capper-Volstead gives

farmers and ranchers

real bargaining power.
Rural Cooperatives / July/August 2005 3

Rural COOPERATIVES (1088-8845) is published

bimonthly by Rural Business–Cooperative Service,

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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.

Mike Johanns, Secretary of Agriculture

Thomas C. Dorr, Under Secretary,

USDA Rural Development, 

Peter Thomas, Administrator, 

Rural Business-Cooperative Service

Roberta D. Purcell, 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 2005 Volume 72 Number 4

p. 4

p. 8

p. 18

p. 22

FEATURES & NEWS

4 USDA marks 70th anniversary 

of landmark rural legislation

8 Atlantic Tender Beef

Canadian co-ops expand market for home-grown meat

By Tom Webb

12 Bucking the Trend

Small dairy co-ops targeting niche markets 

By Carolyn Liebrand

18 New Technology: Opportunity and Challenge

Technology changes could turn milk 

plants into ‘dairy refineries’

By Charles Ling

22 No Shell Game

Oyster co-op hopes to revive Mystic’s faded shellfish industry

By Stephen Thompson

26 The Inside Scoop on Outside Help

Outside co-op development specialists play crucial role

By Gerald Ely

29 Consolidation, expansion spark 

growth in co-op feed sales

By Eldon Eversul

DEPARTMENTS

2 COMMENTARY

21 LEGAL CORNER

33 NEWSLINE

39 INSIDE RURAL DEVELOPMENT

On the Cover:

The verdant pastures of Prince Edward Island provide abundant forage

for the province’s beef and dairy cattle. The Atlantic Producers Beef

Cooperative and Co-op Atlantic are working together to create a bigger

market for home-grown beef. Photo by Christian Ruel, courtesy Mirrorlock

Photography, www.mirrorlock.com.
4 July/August 2005 / Rural Cooperatives

eventy years ago, much of rural America

existed in a world of candle and lantern

light after the sun went down. Long after

most urban citizens had electric lights

and power, the nation’s rural quality of

life and productivity were severely hampered by the

lack of widely available electricity. Only about 10 percent of America’s farms had electricity in the early

1930s and progress at expanding service was very slow.

The country was also in the midst of a terrible economic depression that caused millions to lose their

jobs. Large swathes of the nation were also suffering

from a severe drought and wind storms that combined

to create the “dust bowl” conditions that drove tens of

thousands of farmers from their land. 

In 1935, Congress responded with two crucial

pieces of legislation that forever changed the face of

rural America, creating the Rural Electrification

Administration (REA) and Resettlement

Administration. Both were among the predecessor

agencies of today’s USDA Rural Development.

The REA, working in partnership with thousands of

local utility cooperatives, brought electric power to

almost every corner of the nation. Rural electrification

happened much quicker than many dreamed possible

at the time. Indeed, many historians say that the effort

was one of the federal government’s greatest success

stories of the 20th century. In 1949, REA added a rural

telephone program that had a similar impact on bringing telephone service to rural areas. 

Like the REA, the Resettlement Administration had

a dramatic impact on the quality of rural life. Focused

initially on emergency relief during the crisis of the

Great Depression, the Resettlement Administration

made small loans to help farmers get through tough

times, built and managed migrant worker camps, constructed rural water projects, purchased land for conservation purposes, resettled displaced farmers on new

land and even built entire model communities from

the ground up. Out of this eclectic mix of programs

grew the Farm Security Administration and then the

Farmers Home Administration (FmHA). 

S

USDA marks 70th anniversary 

of landmark rural legislation
Rural Cooperatives / July/August 2005 5

REA and FmHA merged with several

other USDA programs — including the

Agricultural Cooperative Service — to

create USDA Rural Development in 1994. 

Sec. Johanns notes huge

impact on quality of life

The 70th anniversary of the creation

of REA and the Resettlement

Administration — which launched

America’s quest for rural electrification,

homeownership and economic security

— was marked during a special ceremony

at USDA headquarters in Washington,

D.C., in May. 

“The rural electrification effort of the

20th century serves as a benchmark of

excellence,” Agriculture Secretary Mike

Johanns said. “In 70 years, the quality of

life in rural America has dramatically

improved, due in large part to the massive effort by USDA to bring economic

opportunity, affordable housing and electric, telephone, water and wastewater

infrastructure to rural communities

across the nation. President Bush has

now challenged us to bring telecommunications technologies, such as broadband, with the same dedication to rural

communities by 2007.” 

The arrival of electricity on farms and rural

towns had a dramatic impact on the quality

of life and productivity of the nation. Above,

satisfied customers outside the office of

Vernon Electric Co-op in Westby, Wis.

Photo courtesy Vernon Electric Co-op. Photos at

left and below, courtesy National Rural Electric

Cooperative Association (NRECA).
6 July/August 2005 / Rural Cooperatives

Having grown up on a dairy farm in

Iowa, Johanns said he feels a personal

connection to the mission of Rural

Development. 

“When I was growing up, I asked

my mother, ‘can you remember a time

when you did not have electricity?’”

Johanns recalled. “She said, ‘Yes, of

course. When your dad and I started

farming and milking cows, it was by

hand.’ My mother was a very plainspoken woman, and added, ‘As a matter of

fact, half the heck I caught in my life

was from not holding the lantern right

while your dad was milking the cows.’”

As the former governor of

Nebraska, Johanns said he takes pride

in knowing that the “father of the

Rural Electrification Program” was

Senator George Norris of Nebraska.

Johanns said he keeps a bust of Norris

on his desk. Johanns quoted Norris

from a letter he wrote in 1935 to

Morris Cook, the first REA administrator, saying, “If you can launch this

great work in the right direction and

demonstrate that it will bring comforts, enjoyment and prosperity to our

farmers and that it can be done without financial loss, you will have made

one of the greatest contributions

towards the improvement of farm life

that could possibly be imagined. 

“George Norris was right about

that,” Johanns added. “His vision has

been a foundation of economic development in rural America for the 70

years since then.”

Johanns said the Resettlement

Administration helped ease the economic crisis faced by millions of

Americans in the1930s, and noted that

the Water Facilities Act of 1937 provided loans for farm water systems in

17 western states where drought and

water shortage were familiar hardships. 

Enduring commitment 

to rural America

“The Rural Development programs

today fit like the strands of a thick

rope. Together, they are stronger and

more able to do the job than just going

it alone. The Rural Development mission also fits well into the wider universe of so many USDA programs,”

Johanns said, noting that President

Bush has proposed $12.8 billion for

USDA Rural Development programs

in 2006.

Competition in agriculture is

stronger than it’s ever been, Johanns

said, but he stressed that American

farmers and ranchers can, and do,

compete successfully in a worldwide

marketplace. “With the tools that

USDA Rural Development provides to

rural residents and communities, they

also can compete.” USDA is helping

rural communities and producers

invest in new technologies, helping

them develop value-added products

and open additional markets. 

“The rural communities I know are

holding on to their values, but they’re

also embracing the future,” Johanns

said. “They are creating what I call the

new rural America, a rural America

that combines all of the benefits of traditional rural life...with all of the

advantages of the 21st century. It’s a

very remarkable thing to see.”

Johanns thanked Rural Development employees for “making a difference in the lives of millions of real

Americans: shop owners, teachers, factory workers, mothers, fathers and the

next generation. You may never meet

them, but you are very, very much a

part of their lives. And they and our

entire country are better off for your

service.” 

Gilbert Gonzalez, then USDA acting under secretary for rural development, said rural America must respond

to new global markets and competition, and that economic diversification

offers new and emerging opportunities

for the rural economy. He too offered

his thanks “to the many thousands of

dedicated employees over the past

seven decades” who have made USDA’s

The electrification of rural America was accomplished through a partnership of user-owned

co-ops and the federal government, says Glenn English (top photo), CEO of NRECA (top).

Agriculture Secretary Mike Johanns (above) calls Senator George Norris — a driving force

behind rural electrification in the 1930s — a personal hero and he keeps a bust of Norris on

his desk. Above right, USDA staffers Sam Morgan (fiddle) and Ray Sheehan provided some

unplugged music for the 70th anniversary celebration. Color USDA photos by Pete Manzelli. Black

and white photo courtesy NRECA. 
Rural Cooperatives / July/August 2005 7

rural development programs work. 

“There is no doubt in my mind that

— as I travel across the United States

and see the millions of people you’ve

assisted — that you have made a difference,” Gonzalez said. Rural Development today has a loan portfolio of

more than $87 billion invested in rural

America, including $40 billion in utility loans, $40 billion in housing loans

and more than $6 billion in business

and farmer cooperative loans. 

Electric co-ops key to

rural advancement 

Business Week magazine in 1937 said

the REA program — still in its infancy

at that point — was doomed to failure,

noted Glenn English, CEO of the

National Rural Electric Cooperative

Association. “The magazine said it’s

crazy to think that you can have a

bunch of farmers out there that the

federal government is going to loan

money to, and they’re going to be able

to take care of their own needs. But

here we are, 70 years later, and we sure

proved Business Week wrong,” English

continued. 

About 37 million people in 47 states

today get their electricity through

cooperatives, English continued. “No

one else wanted to provide power to

those farmers and people living in

those rural areas. This (REA) executive

order made it possible for private citizens to partner with their government

— made it possible for people to come

together to take care of their own

needs,” English continued, calling the

effort “the ultimate in self-reliance.”

The electric co-ops that formed all

across rural America in the 1930s

often had only 200 or 300 members,

English noted. These co-ops allowed

rural people to “actually own the

business and determine their own fate

and their own future through their

own elected officials.” Today, he

noted, about 43 percent of the national electrical distribution system is

owned and maintained by about 10

percent of the population, through

their co-ops. Electric co-ops generate

about $1 billion annually for state and

local government coffers through the

taxes they pay. 

John Rose, CEO of the National

Telephone Co-op Association, which

represents more than 500 telephone

co-ops and companies, said the REA

program had a bigger impact than

even the co-op numbers indicate,

because it motivated private utilities to

also extend service to rural customers

they otherwise would likely have

ignored. Rose, a former employee of

USDA’s rural electric program, said

Rural Development’s efforts to expand

broadband Internet service to rural

America may have a similar impact. 

Rob Johnson, CEO of the National

Rural Water Association, which represents almost 25,000 water and wastewater service providers, said that

thanks to cooperatives that serve the

rural community where he farms —

Loco, Okla. — he gets better water,

phone and Internet service than when

he lived in a much larger city. He

thanked all the USDA staff at the

meeting for “the wonderful past that

you’ve created for rural residents,” and

for their “commitment to a better

future for making rural development

work. You see our goal — our jobs —

are not done,” Johnson said, noting

that many rural people still don‘t have

the kind of water service, telecommunications and electrical service that

they need. ■

“The rural communities I know are

holding on to their

values, but they’re

also embracing the

future.” 

— Ag Secretary 

Mike Johanns 
8 July/August 2005 / Rural Cooperatives

By Tom Webb

Editor’s note: Webb is a former advisor to

Canadian Prime Minister P. E. Trudeau.

He is a cooperative business consultant and

program manager of the International

Master of Management - Cooperatives

and Credit Unions Program, delivered by

distance education from Saint Mary’s

University in Halifax, Nova Scotia. More

information about the program may be

found at: www.smu.ca/mmccu and about

Webb at www.global-co-operation.com. 

eef producers in the

Atlantic Canada region –

comprised of Nova

Scotia, New Brunswick,

Prince Edward Island, Newfoundland

and Labrador— have long struggled to

overcome the perception that their

product was inferior to beef from western Canada and other regions. But this

picture is being turned around through

a comprehensive production and

branding program. 

This effort includes the opening of

a co-op beef-processing plant in Prince

Edward Island, the establishment of

strict beef-production quality and safety standards, and the launching of the

well-received Atlantic Tender Beef

brand. The branded beef program is a

joint effort of the Atlantic Beef

Producers Cooperative, headquartered

in Borden, Price Edward Island, with

the consumer co-ops that share membership under the umbrella of Co-op

Atlantic, a federated co-op headquartered in Moncton, New Brunswick. 

The beef farmers’ new-found marketing clout has helped to somewhat

soften the severe blow the Canadian

beef industry absorbed when the U.S.-

Canadian border was closed to cattle

exports following the discovery of a

case of BSE that originated in western

Canada. 

Family farms in the region remain

under enormous pressure and face an

uncertain future due to various challenges, but their new marketing strategy has given them a better chance to

withstand negative forces. The co-op’s

Atlantic Tender Beef

Canadian beef producer & consumer co-ops 

expanding market for home-grown meats 

Darlene Sanford, president of the Prince Edward Island Cattleman’s Association and a member of the Atlantic Beef Producers Cooperative,

on her farm near Mt. Carmel, Prince Edward Island. Photo courtesy Cooperative Atlantic 

B
Rural Cooperatives / July/August 2005 9

effort is benefiting not just producers,

but all of the region’s nearly 2.5 million people by helping to strengthen

the economy of Atlantic Canada. 

Reinvigorating dormant industry 

For at least 25 years, Atlantic

Canada’s beef was poorly marketed and

the region’s cattle industry was generally underdeveloped. Stores in the

region — even cooperative retail outlets — mostly carried western beef,

which had a reputation for high quality, while the region’s own beef was

considered “unreliable.” 

Consumer demand forced retail

grocery co-ops and other food retailers

to buy the majority of their beef products from western Canada or abroad

because they lacked local suppliers who

could offer a consistent supply of topquality beef products.

While farming, forestry and fishing historically have been dominant

industries in this region and remain

key industries, their share of the

regional economy has declined during

the past 25 years. Still, the beef industry alone in Atlantic Canada generates

$100 million in annual farmgate

receipts, so its well-being is very

important to the region’s economy.

Beef producers saw an opportunity

to improve their market position

through their membership in Co-op

Atlantic, a regional cooperative wholesaler. Co-op Atlantic actually began

life in 1927 as the Maritime Livestock

Board, which evolved over time into a

multi-faceted, federated co-op. It

serves not only farmer cooperatives,

but also retail consumer co-ops, housing co-ops and a variety of other smaller co-op sectors. 

Co-op Atlantic is today an integrated,

agri-food business serving 135 member

co-ops throughout Atlantic Canada. It

had 2003 sales of more than $508 million (Canadian). Retail sales of its member co-ops are close to $1 billion. 

The cooperative is a significant

player in consumer products, agriculture and petroleum products, as well as

real estate and housing development.

Collectively, Co-op Atlantic and its

member co-ops employ more than

5,000 people and serve more than

226,000 member-families.

Agri-foods strategy

There has long been tension within

Co-op Atlantic resulting from the

dominance of the retail co-ops, which

for many years have been more prosperous than farmer co-ops. The farmer

co-ops sometimes feared that they

were the “tail being wagged by the

consumer dog.” 

At the same time, there has also

been a deep well of good will among

the co-op sectors, creating opportunity

for innovative thinking about farmer/

consumer cooperation and mutual selfhelp. 

With both farm and retail cooperative members, Co-op Atlantic was in a

strong position to respond to the

growing crisis facing beef and other

farmers. Indeed, many of the keys to

creating a solution to the beef farmers’

problems were already in place.

Co-op Atlantic provides farm supplies for both grain and beef farmers

and operates several feed mills across

the region. It also acts as a meat

wholesaler to the last significant

regionally owned retail supermarket

chain. So it made sense for farmers to

team with Co-op Atlantic to create a

comprehensive beef production and

branding program. 

The Atlantic Tender Beef (ATB)

branding program sets the following

guidelines to ensure highest quality

meats:

• All cattle are fed a high-grain diet with

feeds produced by Co-op Atlantic;

• Beef must grade AA or AAA;

• Feed is hormone- and antibiotic-free

and contains no animal byproducts

or renderings;

• Cattle are dressed at smaller carcass

weights, subject to a minimum aging

period and handled following strict

safety guidelines of HACCP (Hazard

Analysis Critical Control Point);

• Beef is traceable.

All cattle in the program are raised

on the scenic rolling hills and the fresh

air of Atlantic Canada. Consumer coops in the program guarantee to buy

all the beef that is produced, and the

brand has benefited from strong promotional efforts that helped it gain

rapid market acceptance.

To make all this happen required

the creation of complex partnerships

involving: marketing boards, government agricultural agencies in four

provinces, the retail and ag cooperatives that comprise Co-op Atlantic, the

newly formed beef cooperative created

in 2002, secondary processors which

Prince Edward Island, above, is home to the Atlantic Beef Producers Cooperative. Photo by Christian Ruel, courtesy Mirrorlock Photography,

www.mirrorlock.com.
10 July/August 2005 / Rural Cooperatives

manufacture “Market Town” and private label products, plus independent

farmers and their associations. 

Pulling all the pieces together was a

challenge, but Atlantic Tender Beef

was launched in 1998. In 2002, after

only a few years on the market, Co-op

Atlantic’s then-CEO Eric Claus said

“Although we consider it our brand,

we are expecting more and more

Atlantic Canadians will continue to

make it their brand. The numbers tell

the story... the tonnage in beef sold in

stores has risen nearly 19 percent since

ATB was introduced in our member

co-ops. We expect that trend to continue because we’ve worked very hard

to ensure that the quality of the beef is

consistent from week to week.” 

Co-op Atlantic purchases more than

$15 million worth of beef annually

under the program, and the trend is

upward. 

In 2002, Atlantic Tender Beef

grilling steak won a Canadian Grand

Prix Award, presented by the Canadian

Council of Grocery Distributors. The

competition evaluates product innovation, packaging design, labeling, pricing, taste, nutrition, value, quality and

overall benefits to the consumer.

While some people feared that supporting local producers might mean

that they would have to sacrifice quality or price, Co-op Atlantic and the

beef producers deliver goods that meet

the standards of national and international competitors — and often exceed

them.

Packer closing, BSE

pose major challenges

Atlantic Tender Beef was still

in its infancy when Hub Meat

Packers – the only major

packer in the region — was

bought by the giant Maple

Leaf Foods in February 2000. A

press release said: “Hub Meat

Packers currently has annual sales of

approximately $270 million. No

changes are currently planned for the

businesses or their operations.” 

Some hailed the move as promising

stability for the beef industry through

integration with a national meat company. Others feared that the plant was

purchased to achieve market control

and would be closed. After a brief life

under the new owners, the plant was

shut down. 

The implications for Atlantic

Tender Beef were disastrous. Beef producers in the region were left with the

prospect of shipping cattle

to Ontario for slaughter

and then shipping the meat

back — over 750 miles

each way. 

Lightning struck twice

when the U.S. border was

closed to Canadian beef

due to a case of BSE, creating a “perfect storm” of

hardship for farmers. 

The response of the

cooperatives was quick and

decisive. Co-op Atlantic —

together with its co-op

partners — subsidized the

shipping of beef to and

from Ontario and began

planning for a regional, cooperatively

owned beef processing plant. 

An integral part of the plan was the

creation of the new Atlantic Beef

Producers Cooperative. The co-op

came into being in November 2002. By

April 2003, it had 160 members and by

early 2005 membership stood at 200. 

Co-op packing plant

overcomes challenges

Moving from plan to reality was, of

course, not without challenges. Stiff

competition from multi-national retailers have made it difficult for Co-op

Atlantic to invest its planned 50 percent share to make the beef-processing

plant a reality. Aggressive price competition between the major competitors

drove down retail markets and margins, forcing retail co-ops to focus

diminished profits on defensive retail

strategies. Its planned $1.5 million

investment had to be reduced to

$500,000. Finding money became a

problem and progress faltered. 

The Prince Edward Island (P.E.I.)

government stepped in to provide support that put the project back on the

road. P.E.I. offered the co-op a piece

of land in a “food park” at a favorable

price and also helped finance a wastetreatment plant. 

The beef farmers, in spite of the

battering their industry has taken over

the past two years, did not falter in

raising their share of the investment.

To raise their $1.56 million share,

Atlantic Beef Producers Cooperative

sold shares, often referred to as

‘hooks,’ that carried the right and the

responsibility to deliver cattle to the

new plant. 

Every producer share cost $60.

With planned processing of 500 cattle

a week, there were 26,000 shares available. Farmers investing in those hooks

raised the $1.56 million needed to

make the plant a reality. 

The cooperative is in the process of

Co-op Atlantic purchases more the $15 million of co-op beef annually for Atlantic Tender

Beef. Photos courtesy Cooperative Atlantic 
Rural Cooperatives / July/August 2005 11

increasing its ownership of the plant

from 50 to 80 percent. Co-op Atlantic

will hold the remaining 20 percent.

Stock sale exceeds expectations

The co-op initially expected a minimum sale of 18,000 shares. That number was seen as a measure that there

was enough interest in the industry to

move forward. That figure was easily

surpassed.

In testimony before a Canadian

Senate Committee in April 2004,

Atlantic Beef Producers Cooperative

President Dean Baglole said, “We

suspended sales after the initial

run to give us an opportunity to

sit back and see exactly how

many cattle we could put

through. With Co-op

Atlantic as our prime customer, certainly in the

early going we did not

want to have more cattle

coming into the plant

than we could sell. We want to be very

careful and businesslike.” 

A waiting list was established for

would-be share buyers. The $60 share

price is a one-time investment by producers. 

“For someone who has 100 cattle,

[the cost] is $6,000 and they are in for

life, which is very appealing,” Baglole

said.

“Right now, we pay in excess of $80 an

animal to have them shipped to

Ontario; so, to pay $60 to actually own

part of a plant was a no-brainer for

many producers. They felt it was the

right thing to do.”

One of the strengths of the new

plant is that it operates on the basis of

real commitments from farmers to

deliver cattle, ensuring a

steady supply to the plant.

Because it buys only

from members, it is

able to schedule delivCattle on pasture in New

Brunswick, where the

co-op also has members.

Photo by (and courtesy of)

William Clarke,

presspics@gmail.com.

Canadian beef farmers have a history of using cooperative solutions to overcome challenges. Since the early 20th

century, farmers have been instrumental in the development of producer and consumer cooperatives, including

credit unions, that evolved, thrived and grew all across the

Atlantic region. 

As elsewhere, local cooperative development was followed by the creation of second-tier “cooperative centrals,” like Co-op Atlantic, which were created and owned

by local co-ops to meet shared needs.

But even this strong co-op tradition has not stemmed the

out-flow of businesses during the past century from

Atlantic Canada to the powerful economic centers of Central Canada and the United States. Often, these businesses

take the provinces’ best jobs and educated young people

with them. 

Most of the region’s people, even those living in urban

communities, have strong ties to rural communities and the

values they represent. This has led to strong support for the

economic base of rural communities. Surveys show that

Atlantic Canadians want to support their farmers.

About 96 percent of Atlantic Canadians would prefer to

buy and support a local product, while 95 percent prefer

local products if the price and quality are equal. Some 92

percent want to know where and how their food is produced and 80 percent say knowing this kind of information

influences purchases. 

Another 81 percent trust locally produced food more

than imported food. A solid 85 percent support the Co-op

Atlantic Agri-Food Strategy. Food safety and ethical production have become real issues with consumers. 

Among the issues of growing interest to consumers are

animal treatment, additives, pesticides, fertilizers, GMOs

(genetically modified organisms), e-coli and labor practices. The recent move by the U.S. government to pass an

anti-bioterrorism act to protect food from chemical and

biological tampering has heightened awareness among

North American consumers of a wide range of food

issues. 

Consumers increasingly want to know, for both primary

and secondary products, who grows their food, what happens to it chemically and mechanically, and where it

comes from. They want to know what an animal was fed

and its health record. Increasingly, consumers want

“traceability.” ■

— By Tom Webb

Consumers prefer locally produced foods

continued on page 37
12 July/August 2005 / Rural Cooperatives

By Carolyn Liebrand, ag economist

USDA Rural Development

he 1990s was a period of

continued adaptation by

the dairy industry to

dynamic, rapidly changing market conditions.

These changes included advances in

production technology (both on the

farm and in the milk plant), consolidation and growth of retail food chains,

vertical and horizontal integration in

milk manufacturing/processing sectors,

new trade rules and practices, and

changes in government programs. 

These factors contributed to the

trend of consolidation and mergers

among dairy cooperatives, which accelerated during the waning years of the

century. As a result, just four cooperatives marketed 49 percent of all the

milk marketed by cooperatives, or 41

percent of all milk sold to plants and

dealers in the United States in 2002

(Ling). 

Furthermore, the four largest dairy

cooperatives marketed 74 percent of

the natural cheese, 76 percent of the

nonfat-dry milk and 80 percent of the

butter produced by cooperatives. (The

make-up of the top four cooperatives

varies, depending on dairy product). 

T

Bucking the Trend

Small dairy co-ops adding value for 

members by targeting niche markets 

Many operators of small, traditional dairy farms, such as this, have banded together in niche-marketing co-ops that are producing branded

cheeses and other dairy products. “The Home Place” painting by (and courtesy of) Jerry Raedeke, http://ftinet.com/raedeke/

Photo courtesy Graze Magazine
Rural Cooperatives / July/August 2005 13

However, in spite of these trends

(or perhaps because of them) there was

another marketing development in the

1990s. While many dairy cooperatives

were growing larger in size and scope,

there was corresponding growth in

interest by milk producers in “niche

marketing.” 

Niche marketing means that members’ milk is manufactured into specialty or branded dairy products for specific market segments. These activities are

typically conducted on a small scale.

The idea of niche marketing is to

add value to member milk by producing a unique product, capitalizing on

its specific attributes and selling it to a

relatively narrow target market. The

increasing interest of consumers in

where their food comes from and how

it is produced has created a growing

market for products with attributes

such as “organic,” “artificial hormonefree,” “pasture-based” (grazing), locally

produced and “freshness.” 

Co-ops and niche markets

While some producers have delved

into these activities individually, others

have banded together with like-minded

dairy farmers to form small cooperatives to market milk into these niche

markets. These efforts have been

spurred on by several factors: the need

to preserve a market outlet, milk production style, and/or producers’ desire

to generate added returns on their

milk above what their traditional outlet

offers.

In at least two cases, niche-market

co-ops were formed when milk buyers

would no longer accept producer milk

via their established delivery method.

Thus, to preserve an outlet for their

milk, they decided to own the outlet

themselves. The option of adopting

new technology on the farm to meet

market demands was not available to

them due to religious considerations. 

Similarly, another group of producers found that the payment plan they

had enjoyed from their milk buyer was

being terminated. They banded

together to seek markets that would

continue to pay them premiums based

on the quality and composition of their

milk.

Other producers that formed nichemarket co-ops shared the belief that

consumers desire, and will pay for, cerNiche-marketing co-ops face several challenges. Most

arise because of the small volume of milk they have to market. These hurdles include:

• Higher per-unit costs — The small volume inherently

increases a co-op’s per-unit processing costs. The costs of

shipping partial loads of milk, manufacturing small batches

of cheese and butter and bottling small runs of milk are at a

premium. And, as noted elsewhere, the long-established

cheese-manufacturing cooperatives required $5 per cwt of

milk of member equity in 2002.

• Ability to attract qualified personnel — Due to their

small scale, it may be difficult to offer salaries competitive

enough to attract management and personnel of sufficient

quality to operate a plant profitably. Poor management and

staff can derail the success of even a high-quality, highly

desired product. Skilled management is critical to avoiding

or minimizing the effect of any “hidden-bummer factors”

that can be costly to address, says Gerry Ely, cooperative

specialist for USDA Rural Development in Pennsylvania. 

These troubles can include the unforeseen cost of getting the cooperative’s products into retail stores (slotting

fees), unanticipated packaging costs (customers not

returning the novel glass milk bottles when the deposit

charge did not cover the bottles’ actual cost), or perhaps

unanticipated costs of complying with labeling requirements (waste and/or fines from mislabeling or ineffective

labeling). 

Producing a quality product is just the first step. The

cooperative must next efficiently get its product to market

in good and attractive condition. Distribution channels must

be efficient so as not to eat up the added value derived

from processing and packaging. Moreover, they must have

a plan for handling “returns” and unsold product. Finally,

they must be savvy about marketing — be able to get the

word out about the uniqueness of their product and convincing consumers to seek it out and to pay more for it. 

• Contract processing — To avoid the high costs associated with owning and operating a small plant, some of

these groups contract with a plant to have their specialty

products produced for them. This means they give up some

control over the production process. These groups are then

at the mercy of that processor — be it for the rates

charged, quality, reliability or continuity of service. Many of

the newer niche-marketing cooperatives are operated on

this basis, presumably to avoid the significant financial

commitment and management demands that come with

owning a plant. 

Some of these that have their products made for them

rely on members to carry out the marketing and distribution

tasks. This way, the members capture some of the labor

charge that would otherwise go to middlemen. 

However, the opportunity cost of the farmers’ time

should not be overlooked. Labor, even if “unpaid,” is never

cost-free. Furthermore, while members may excel at producing milk, they may not have the necessary expertise to

carry out the marketing and distribution functions. Only if

they are able to perform the middleman functions in an efficient and cost-effective way will they be able to capture

profits. ■

— By Carolyn Liebrand

Hurdles to niche-markets
14 July/August 2005 / Rural Cooperatives

tain special attributes of their milk.

These select characteristics arise from

production techniques that they

believe affect the quality of their milk

(and resulting dairy products). These

include no use of artificial hormones,

pasture-based production, organic production, the breed of dairy cow, the

location of the farms and the size and

ownership of the dairy farms. 

Furthermore, some of the members

were small-scale producers, hard pressed

to make a living in an environment of

increasing costs and volatile milk prices.

They sought continued viability for

their farms by capturing a higher return

through these specialized cooperatives. 

These producers may look for additional revenue from niche markets

rather than attempt to gain efficiencies

through traditional means (such as

increased size of farm operation). In

addition, part of their motivation may

be philosophical — a belief in a certain

scale of agriculture or production practices (for instance, family farms and/or

organic production).

A number of articles in this magazine in recent years have profiled various producer-group efforts to add

value to their milk in this manner (see

the January/February 2005, September/

October 2003, and July/August 2002

issues for examples). This article

attempts to summarize the niche-marketing efforts by U.S. dairy cooperatives.

Traditional niche dairy co-ops

Traditionally, a niche-marketing

dairy cooperative was one that

processed all of its members’ milk in

its own plant to manufacture and market specialty or branded dairy products

(typically cheese) for particular markets. In 1992, USDA documented 25

of these cooperatives, labeling them

“branded cheese” cooperatives (table

1). A couple of these co-ops also produced minor quantities of other products, such as butter, nonfat dry milk or

whey products in addition to cheese. 

These branded-cheese cooperatives

captured some marketing margins, in

addition to processor margins, by moving operations closer to the consumer

and by marketing distinctive products

that commanded premium prices.

They are predominantly located in the

East North-Central region, especially

Wisconsin. 

Following the overall trend of

declining cooperative numbers, the

number of branded-cheese cooperatives fell by 7 cooperatives (28 percent)

between 1992 and 2002. However, the

net decline masks the dynamics of

what occurred. 

Seventeen cooperatives left the category during that period. Of that total,

12 branded-cheese cooperatives (48

percent of the 1992 total) went out of

business, nine of which ceased operations altogether under stressed financial conditions, while three merged

with other, larger cooperatives or were

acquired by an investor-owned firm. 

At the same time, four niche dairy

co-ops grew to the extent that their

expanded product lines moved them

into a new category, which USDA calls

“diversified dairy cooperatives.” These

dairy co-ops have multiple product

lines, including commodity dairy products such as bulk cheese and butter,

and also sell a large amount of milk in

bulk. One co-op took the opposite

track and ceased manufacturing cheese,

but continued marketing members’

milk.

In contrast, 10 cooperatives were

added to the branded-cheese category

between 1992 and 2002. Five were

existing cooperatives that began (or

resumed) manufacturing cheese and

the other five were newly formed

cooperatives. Therefore, there were 18

niche marketing cooperatives operating in 2002, representing 9 percent of

all dairy cooperatives. Because these

cooperatives tend to be rather small,

they handled less than 1 percent of all

milk handled by dairy cooperatives.

Long-established 

branded-cheese co-ops

In 2002, 13 niche-marketing cooperatives were long-established businesses, having been in operation for

many decades. This indicates that

manufacturing non-commodity cheese

has long been a viable alternative for

some groups of dairy producers. 

However, as was noted earlier, more

than one-third of the branded-cheese

cooperatives went out of business

between 1992 and 2002 due to poor

financial performance. These smaller,

specialty-cheese makers must offer

superior and unique products and service in order to survive in an environThe Duprey family, members of Our Family Farms Cooperative in western Massachusetts,

sample some of their product. Photo courtesy Our Family Farms 
Rural Cooperatives / July/August 2005 15

ment where large cheese manufacturers have considerable market clout due

to the latest technology in their highvolume, low-cost plants. 

These long-established, brandedcheese cooperatives are almost all

located in Wisconsin (with one each in

Ohio and Pennsylvania). They use all

of their member milk in their own

plants, and typically are small operations (10 of the 13 cooperatives handled less than 50 million pounds of

milk annually) and all have grade-B

milk producer-members.

These long-established cheese-marketing cooperatives averaged $10.03 in

assets per-cwt of member-milk in 2002

(Liebrand), while $5.80 (58 percent of

the total assets) was provided by members. 

This level of asset use was far higher than for other operating types of

dairy cooperatives. However, these

cooperatives also generated higher

average net margins per-cwt of milk

handled than did the other types of

cooperatives: 32 cents vs. 21 cents for

all dairy cooperatives in 2002.

New niche-marketing co-ops

USDA identified seven cooperatives

that were formed after 1992 that market distinctive, niche-dairy products.

Moreover, most of these (5 cooperatives) were formed between 1992 and

2002. These are all small cooperatives

marketing milk or milk products that

have unique attributes attractive to

certain consumers. 

Two of these newer cooperatives

marketed bottled milk under their own

label while the other five made a wide

variety of cheeses and flavored cheeses;

and at least one of these co-ops made

butter in addition to its specialty

cheese. Several were located in Wisconsin with others in Massachusetts,

Minnesota, Ohio and Pennsylvania.

All of these new niche-marketing

cooperatives attempt to capitalize on

the “natural” production practices of

their members. They want consumers

to know that their products come from

family farms and that no artificial hormones are used to enhance milk production. Several emphasize their practice of keeping cows on pasture (which

some view as more humane) and say

this affects the composition of their

milk in a health-promoting way. 

Some farmers have been stirred into cooperative action

when they noted the gap between the price of their milk as

it leaves the farm and the prices of dairy products in the

stores. In 2000, for example, the average retail price for

one-half gallon of milk and of cheddar cheese was around

three times the farm value of the milk used in making the

retail products. 

Thus, many a farm group has been exhorted to addvalue to members’ raw agricultural products to capture

higher revenue. However, the gap between the price of

milk at the farm and the price of end-products from milk

represents the total marketing bill: the cost of getting the

raw product off the farm and into consumers’ hands.

“These costs are likely to be incurred regardless of who

conducts the middleman operations.”

The bulk of what may be thought of as “middleman profits” actually represents the expenses associated with getting farm products into consumers’ hands: labor, packaging, rent, transportation, advertising, depreciation, taxes,

fuels and energy, interest and repairs. Of course, there is

opportunity for profit in these activities, otherwise there

would be no incentive to perform them. 

Yet, in order to capture any profits, the middleman functions must be conducted efficiently. Any higher-than-average costs due to inefficiencies related to small scale or

inexperience would erode profit margins quickly.

According to USDA’s Economic Research Service

(ERS), pretax corporate profits made up just 6 percent of

the marketing bill for all food in 2000 (Elitzak). Labor was

the largest marketing expense, which accounted for 47

percent of the difference between the farm value of food

and what consumers spent on food in 2000. Packaging was

the next largest expense, accounting for 10 percent of the

marketing bill, followed by profits.

This suggests that if farmers take on some, or all, of the

middleman functions, they may be able to retain a portion of

the profits generated by middleman activities. In addition,

since labor costs are a major contributor to the value added

between the farm gate and dinner plate, farmers may be

able to benefit by providing their own “sweat equity.” 

Any of the middleman steps the members carry out

themselves may allow them to retain a portion of the labor

charge. 

Alternatively, producers could try to raise the value of

their milk as it comes off the farm. This is what the organic

milk producers have been able to do. For example, the farm

value of organically produced milk received a premium of

$4.16 per cwt in 2004, according to Organic Valley (Cheese

Market News). By stressing the benefits of their particular

milk to consumers, niche-marketing cooperatives may

command a higher price for their milk and dairy products. 

If these premium prices more than compensate for the

relatively higher production and marketing costs that are

likely to accompany organic and specialty milk production,

these producers may indeed capture greater returns. ■

— By Carolyn Liebrand

How big are “middleman” profits?
16 July/August 2005 / Rural Cooperatives

The two co-ops that sell bottled

milk emphasize the milk’s local production and therefore its freshness.

They maintain they can deliver the

milk from cow to consumer in far less

time than it takes the large, regional

milk bottlers. 

A couple of the new niche cooperatives were formed by Amish producers

who were seeking a market outlet for

their milk because the milk plants they

traditionally dealt with would no

longer accept milk in cans. These two

cooperatives operate much like the traditional branded cheese cooperatives

— all their milk goes through their

own plant to make cheese. 

For the Amish in particular, though

they own the plants, they do not operate them because it would violate their

religious tenets. A hired cheesemaker

carries out the manufacturing, often

for a portion of the gross income.

(Note: some traditional, brandedcheese cooperatives also operate under

this type of arrangement with a

cheesemaker who furnishes the equipment, labor and tools to make the

cheese out of members’ milk in plants

owned by the cooperative. In

exchange, the cheesemaker gets a

share of the gross income or profits.)

Plant ownership rare 

Only one other new niche dairymarketing cooperative owns a plant.

However, this cooperative only

processes a small portion of its members’ milk in its plant. It sells all of its

member milk to a larger, more established cooperative, then “buys back”

the milk it needs for its own operations. The other cooperative bottling

specialty milk has a similar relationship

with a larger cooperative and is searching for its own plant, but does not own

one at this time.

Thus, five of the seven new nichemarketing cooperatives deviate from

the model used by the long-established

cheese-marketing cooperatives. With

one exception, they do not own or

operate any plants. Rather, they contract with established manufacturers to

make their products on a batch, or copack, basis. 

Because the markets for their specialty products are still limited, only a

small portion of their members’ milk is

needed to manufacture their specialty

products. So, the bulk of their milk

continues to be sold through established outlets. This also contrasts with

the long-established cheese-marketing

cooperatives, which use all of their

members’ milk in their own plants.

It is apparent that for most of these

cooperatives, the fledgling niche-marketing effort is an attempt to garner

supplemental income for members,

rather than a market outlet for all of

their milk production. The volume of

milk moving through these new nichemarketing cooperatives is quite small

— a majority (four out of the seven

niche dairy co-ops) handled less than 5

million pounds of member milk per

year. In 2002, these new niche-marketing cooperatives produced just 16 percent of all the cheese manufactured by

niche-marketing cooperatives; the rest

was produced by long-established

cheese cooperatives.

Continued interest in niche co-ops

The idea of niche marketing continues to attract the interest of dairy proPastureLand in southeastern Minnesota is an example

of a new, branded-cheese and butter micro co-op that has

had considerable success penetrating local and regional

markets. Marketing efforts emphasize that freshness is

enhanced by local production and that it comes

from small family farms that help preserve a rural way of life and that

have a low impact on the environment. 

PastureLand’s member

farms have all recently been

certified organic. Its members’

cows are all kept on pasture. 

“Our job is to manage solar energy,” says

board President Dan French. “We harvest it in the form of

grass, using animals. The healthier the system is, the

healthier our product is going to be.” 

PastureLand’s artisan cheeses are produced in small

batches for the co-op by Eichten’s in Center City, Minn.,

using only fresh milk from members’ pastured dairy herds.

The co-op produces a wide range of Gouda cheeses,

including aged, mild, herb, jalapeno and dill flavors. It also

makes baby Swiss and cheddar cheese, as well as cheddar

curds. 

The co-op’s Summer Gold salted and unsalted butter is

also made in small batches at an old-fashioned,

local creamery in Hope, Minn., using

only sweet cream from the coop’s grass-fed cows. Business

has been increasing at a rate

that recently justified hiring

its first fulltime manager, Jean

Andreasen. 

PastureLand, formed in 1999, was

awarded honors in three divisions by the

American Cheese Society in its 2004 competition, including:

first place salted butter, first place unsalted butter and third

place herb Gouda cheese.

“It is important to us to be an organization that is small

enough that the members have say in future membership,

farm certification and other business matters,” says

French. ■

Micro co-op finding success in local markets 
Rural Cooperatives / July/August 2005 17

ducers. Since 2002, at least seven more

producer groups have formed cooperatives to pursue specialty markets. All

ship to established milk handlers

(cooperatives for the most part) and

look to use a portion of their members’

milk for their specialty product(s). 

Several co-ops in the Northeast

emphasize that they are “local producers” and encourage consumers to buy

their products as a way to preserve the

family farms and rural landscapes in

their state. Most look to bottle and

label milk as being produced locally,

in-state, but a majority (four cooperatives) has not settled upon a specific

dairy product. 

Except for one Amish group, none

own or operate processing facilities.

Most of these efforts (five of the

emerging cooperatives) are in the

North Atlantic region, where there is

interest among residents, consumers

and state officials in preserving their

state’s agricultural heritage and open

space.

Market potential

The very nature of niche marketing

implies a limited market. However, that

is not to say these niche-marketing

cooperatives are precluded from growing into large, successful ventures. For

instance, the Coulee Region Organic

Producer Pool (CROPP) started out as

a small cooperative with seven members marketing to the organic niche

market (see Rural Cooperatives

January/February 2000 and May/June

2005 issues). It is now a large, nationwide cooperative marketing a variety of

organic dairy products under the

“Organic Valley” brand name. 

Large cooperatives such as

Tillamook and Cabot Cooperative (now

part of Agri-Mark, Inc., a dairy marketing cooperative — see the May/June

2000 issue of Rural Cooperatives) have

grown broad regional, if not national,

markets for their premium, branded

cheeses. (These three cooperatives are

classified as diversified cooperatives by

USDA due to their wide scope of activities and are not counted in the number

of niche-marketing cooperatives. In

fact, many of the large, diversified dairy

cooperatives offer a variety of branded

dairy products.) 

A number of long-established

cheese-manufacturing cooperatives

continue to thrive by focusing on quality and supplying specific markets with

specialty cheeses. These successful

cooperatives provide evidence that

continued on page 34

Table 1—Dynamics of branded-cheese marketing cooperatives 

between 1992 and 2002

Number

Branded-cheese cooperatives, 1992 25

Exits of branded-cheese cooperatives

Branded-cheese cooperatives that:

...went out of business 9

...merged with another cooperative 2

...acquired by an IOF 1

...ceased manufacturing operations 1

...grew into expanded and/or more diversified operations 4

Total exits 17

Entries of branded-cheese cooperatives

Cooperatives that:

...began/resumed manufacturing branded or specialty cheeses 5

...formed to manufacture branded/specialty cheese 5

Total entrants 10

Branded-cheese cooperatives, 2002 18

Location:

East North-Central 1 16

North Atlantic 2 1

West North-Central 3 1

1 Illinois, Ohio, Wisconsin 

2 New York, Pennsylvania

3 North Dakota, Minnesota 

Valerie Dantoin-Adamski is a member of a small co-op that produces Northern Meadows

Cheddar Cheese. Photo by Pamela J. Karg
18 July/August 2005 / Rural Cooperatives

By Charles Ling, Ag Economist

USDA Rural Development 

Editor’s note: This article is based on Dairy

Co-op Growth Challenges, Research

Report 206. For a hard copy of the complete

report, e-mail your request (include report

number) to: dan.campbell@usda.gov, or call

(202) 720-8381. The complete report is

also available on the Internet at: www.rurdev.usda.gov/rbs/pub/newpub.htm.

ecent technology developments and evolving

technology now on the

horizon will create new

uses for milk, and new

dairy ingredients and products. New

manufacturing processes will create

opportunities for further growth of the

dairy industry. But along with these

new opportunities come challenges. 

In a future that is driven by technology, dairy cooperatives will face challenges in four primary areas: (1) research

and development; (2) product development and marketing; (3) acquiring manufacturing and processing technology;

and (4) equity financing. 

Technology could create 

“milk refineries”

Two aspects of modern technology

are becoming vitally important for the

future of the dairy industry: (a) filtration technology for fractionizing milk

components, and (b) processing technology for making dairy products

using dairy-based ingredients with only

limited amounts of fresh milk. Wider

adoption of these technologies will

likely cause further restructuring of the

milk industry, presenting dairy cooperatives with many challenges and potentially rewarding opportunities. 

Filtration is the use of semi-permeable membranes to separate and “harvest” milk components for uses as

ingredients in various foods, beverages

and nutritional or pharmaceutical

products. Milk protein concentrate

(MPC) is one such ingredient. 

Technological advances in the

future may transform milk plants into

milk “refineries” that can fractionate

milk components into all kinds of

desired dairy ingredients.

In addition, advances in processing

technology may allow the use of dairy

ingredients combined with only a small

amount of fresh milk to manufacture

dairy products. An example of this is a

patented “wheyless process” for production of mozzarella cheese. This

process allows cheese to be manufactured from non-perishable or dried,

shelf-stable dairy ingredients. 

Developments in filtration and processing technology combine to allow

greater flexibility in the location of

cheese manufacturing facilities because

handling and/or transporting large

quantities of fresh milk is not required.

Also, the need for refrigerated storage

of fresh milk is minimal. Several other

wheyless-process patents also have

been recently granted for making various other dairy products from dry

ingredients.

The proliferation of this type of

manufacturing process technology

using dry ingredients is going to alter

the dairy landscape in a profound way.

A plant making cheese (or other dairy

products) from mostly dry ingredients

can then be located almost anywhere,

with no need to be close to dairy

farms. The plant would no longer need

New Technology:

Opportunity & Challenge 

Technology changes could turn milk plants into ‘dairy refineries’

R
Rural Cooperatives / July/August 2005 19

The evolution of the milk industry has some striking

resemblances to the developments in the tomato industry.

In essence, the tomato industry has developed into two

separate sectors — fresh market and processing sectors

— each with specific varieties of tomatoes and distinctive

characteristics. 

Tomatoes for the fresh market are produced in every

state, while production of tomatoes for processing is highly

concentrated, with 95 percent grown in California.

In the 1950s, 33 states grew processing tomatoes and

California’s share was only 55 percent of the market. Development of mechanical harvesting equipment and tomato

varieties able to withstand mechanical harvesting led to

concentration of the industry in California. The long growing season, advanced irrigation systems and dry harvesting

weather combined with other natural advantages to help

the Golden State come to dominate the U.S. market. 

Development of bulk storage technology and transportation allowed processed tomato products to be manufactured year round and processors in the Midwest and East

serve as final fabricators of processing tomatoes grown

and partially processed in California. 

While the milk industry is unlikely to be differentiated to

such extremes, the evolution of the tomato industry provides

food for thought as milk producers ponder the future. ■

— Charles Ling

Dairy & tomato industries show some parallel trends

to deal with producer payrolls, milk

hauling, weather-induced intake variability, seasonality of milk production

and composition, seasonal inventories

of cheese, etc. This development will

have great implications for milk producers and their cooperatives, especially in regard to cooperatives’

roles in the supply chain.

Domestic MPC has 

non-price advantages

Among dairy ingredients that are

currently of particular interest to

dairy producers are MPC,

MPC/casein, casein and caseinates.

These are used in the maufacture of

cheese products, nutritional supplements and other dairy and nondairy foods.

Until recently, there was no

domestic production of MPC, casein

or caseinates in the United States.

Milk prices in the United States are

high enough that domestic production of these products cannot compete

with imports based on price. Other

protein products, however, such as

whey protein concentrate (WPC) and

other whey products, can compete very

well with foreign production because

whey price is not regulated.

However, domestic milk-protein

production may have some advantages

over imports, despite its higher price.

These advantages include fresher protein products at a lower transportation

cost to customers, better customer services due to proximity to end-users,

and the ability to supply protein products in wet form or caseinates made

from fresh milk.

Based on the profitability of milk

production, the western United States

is the region that is most certain to see

continued growth in milk production

and could support new plant capacity.

This is the region where new milkprotein plants will likely be located.

Indeed, the first plants in the United

States for MPC production are located

in Tempe, Ariz., and Portales, N.M.

One of the important functions of

dairy cooperatives is supply-balancing

and last-resort processing of surplus

milk. Making milk protein ingredients would be an alternative outlet

for such milk. Dairy cooperatives

are certainly going to play a prominent role in a milk-protein ingredient sector if it becomes economically feasible to produce such products

domestically.

Cooperatives also are end-users of

dairy ingredients. Some have been

making non-traditional dairy or related products either to satisfy consumers’ shifting demand or to offer a

complete line of products to customers. In most cases, the non-traditional products are dairy-based, and

dairy ingredients constitute the major

share of the manufacturing inputs.

R&D key to market niches

Research and development is the

foundation of manufacturing and processing technology, product development and marketing. Through their

dairy check-off dollars (an assessment

on milk production that funds dairy

research and promotion), dairy farmers

Loading time at Car-Min-Vu Farms in Webberville,

Mich. Photo by Laura Moser, courtesy Michigan Milk

Producers Association

continued on page 35
20 July/August 2005 / Rural Cooperatives

Machinery and equipment are the embodiment of new

manufacturing technology. Cooperatives usually acquire

new manufacturing technology by purchasing equipment.

There are considerable economies of scale associated with

the new equipment technology. However, as the scale of

dairy plants grows larger, the cost of building a new plant

with new machinery becomes more substantial. The plant

also requires a large milk volume to sustain the operations.

Financing is the ultimate challenge that will enable producers and their co-ops to meet these challenges. 

A dairy cooperative’s debt financing may work much the

same as for any business. Its equity financing, however, is

unique and may have one or more of these features: 

• common stock held by cooperative members (usually of

nominal value); 

• retained patronage as net savings allocated to members

based on patronage but retained for operations;

• capital retains that are milk payments but are withheld at

a certain rate per hundredweight of milk; 

• retained earnings that are earned on non-member business. Members must treat retained patronage and capital retains as income for tax purposes. These retains are

revolved back to members after a certain period of time.

• In lieu of retained patronage and capital retains, a cooperative may have a base capital plan. Under the plan, a

target base capital level is established at a rate per hundredweight of milk marketed during a representative

period. 

Managing a cooperative’s equity financing is a unique

business challenge because of three often-competing forces: 

1. Members want minimal retains held back from their

patronage checks and as short a revolving period as

possible; 

2. The cooperative needs an adequate amount of capital

for operations; 

3. Lending institutions require the cooperative to maintain

a certain level of equity.

The base capital plan may be viewed as a compromise

among the three conflicting interests. Under the plan, once

the prescribed base capital level is attained, a member can

expect to receive all allocated patronage earnings in cash.

The cooperative would have an adequate level of capital to

operate with, and the base capital would have a certain

degree of permanency that helps relieve lending institutions’

concern about risk.

Debt financing increases 

From 1997 to 2002, average cooperative equity increased

by 3 cents per hundredweight, while assets increased by 97

cents and liabilities increased by 95 cents per hundredweight.

Contributions by cooperative member-producers to the

increased capital needs were minimal, so cooperative growth

was mostly financed by debts.

Various alternative equity financing methods have been

used to reduce cooperative members’ fiscal burden and

investment risks, including: public stock corporations, limited

liability companies (LLC), joint ventures and new-generation

cooperatives.

It is difficult to operate a public stock corporation or LLC on

a cooperative basis because of one or more of the following: 

• Investor interests may conflict with the one-person, onevote democratic control of cooperatives; 

• Producers support the cooperative’s business by patronizing it, investors do not; 

• With investor capital, the cooperative is likely to lose

Capper-Volstead status; 

• In a dairy cooperative, the distinction between milk pay

prices and premiums vs. profits is not clear-cut, and conflicts between producers and investors may be very difficult to reconcile; 

• Investors’ focus on returns on investment may create

fundamental conflicts with a co-op’s mission to provide

benefits for member-producers. 

The new-generation cooperative model has strengths,

including a strong market orientation, and the ability to raise

investment capital from members for specific projects and to

provide members with greater flexibility in marketing their

equity if they leave the co-op. But these co-ops have also had

their share of problems (see pages 15-19 in the Jan–Feb. 2001

issue of Rural Cooperatives, archived at:

www.rurdev.usda.gov/rbs/pub/openmag.htm ). 

The joint-venture model has worked well for many co-ops,

some of which are organized as LLCs. 

On the marketing side, a joint-venture LLC may be used by

a cooperative and its partner to develop and market certain

dairy products. The cooperative supplies milk to the LLC while

the partner supplies technical and marketing know-how. The

joint-venture partners share the financing and the risk of the

business activities of the LLC. This organizational model

reduces the financing burden and risk exposure of cooperative members, while a market outlet for milk is secured.

The promising rewards of adapting to new technology can

be exciting, but the necessary industry adjustment can be

challenging for dairy farmers and their cooperatives. Success will depend on adequate member equity capital, well

thought-out strategic plans and research and development.

■

— By Charles Ling

The ultimate R&D challenge: financing new technology
Rural Cooperatives / July/August 2005 21

By Donald Frederick

Program Leader for Law, 

Policy & Governance

USDA Rural Development

e-mail: donald.frederick@usda.gov

he American Jobs

Creation Act of 2004 contains several provisions

favorable to rural cooperatives and their memberusers. One that will directly benefit

many cooperatives and other businesses

is the new Qualified Production

Activities Income deduction.

The Qualified Production Activities

Income deduction is first available for

tax years beginning in 2005. This

report is a summary of the terms used

and general rules for claiming this new

deduction. As this is somewhat complicated, readers are encouraged to discuss

how this new deduction may benefit

them with their professional tax adviser.

Three steps to success

Claiming the new deduction involves

three computations. Congress has created some new tax jargon to describe

these computations, so taxpayers will

want to become familiar with these

terms as they begin planning to maximize the benefit of the new deduction.

Step 1 — Compute “Domestic

Production Gross Receipts,” which

are the total gross receipts from any

lease, rental, license, sale, exchange or

other disposition of:

a) Tangible personal property manufactured, produced, grown or

extracted in whole or significant

part in the United States, 

b) Electricity, natural gas or

potable water produced in the

United States, and

c) Construction performed in the

United States.

Step 2 — Compute “Qualified

Production Activities Income,” which

is your Domestic Production Gross

Receipts determined in Step 1 minus:

a) Cost of goods sold allocable to

those receipts,

b) Other deductions, expenses and

losses directly allocable to those

receipts, and

c) A pro-ratable portion of other

deductions, expenses and losses

not directly allocable to such

receipts or other income.

Step 3 — Compute your

“Qualified Production Activities

Income (QPAI) deduction,” which is

your Qualified Production Activities

Income multiplied by the applicable

percentage for the tax year. The applicable percentage for each tax year, as set

out in the law, are:

a) 3 percent for tax years beginning

in 2005 and 2006,

b) 6 percent for tax years beginning

in 2007 through 2009, and

c) 9 percent for tax years beginning

in 2010 and later.

While this may look simple, it may

require some careful analysis to determine, for example, which receipts qualify as domestic production gross receipts

or how to allocate costs between activities that generate domestic production

gross receipts and those that produce

other types of income.

Limitations on the QPAI deduction

Congress has included two upper

limits on a taxpayer’s QPAI deduction:

a) QPAI may not exceed taxable

income for the year. If a taxpayer’s

QPAI is more than its taxable income,

the deduction is limited to taxable

income times the applicable percentage

for that year. If the taxpayer has no taxable income or a loss for tax purposes,

the QPAI deduction is lost for that year.

b) The QPAI deduction may not

exceed 50 percent of W-2 wages

paid by the taxpayer as an employer during the tax year. This is

consistent with the general aim of

the new law: to reward companies

that create jobs in this country; it

should not be a burden on cooperatives.

Special rules favor 

manufacturing over service

The new law clearly favors businesses

that produce things over those that perform services. This is illustrated by several special rules that apply to the computation of domestic production gross

receipts (step 1 above) and distinguish

between these two types of economic

activity, including:

a) Income from food processing

(but not retail operations) is

included.

b) Income from processing, storing

and handling (but not transporting) agricultural products used

in manufacturing, producing or

growing other goods is included,

LEGAL CORNER

Get ready to claim 

your “QPAI deduction”

T

continued on page 36
By Stephen Thompson,

Assistant Editor

n a little village near Connecticut’s famous

Mystic Seaport Museum, a small cooperative is

working to develop Mystic Harbor into a

thriving source of high-quality oysters. The

Noank Aquaculture Cooperative, in operation

for five years, is still working towards full profitability for its

members, but they are optimistic about its prospects.

Noank is an archetypal New England hamlet, with gracious old wooden houses and narrow shaded streets, dominated by a beautiful traditional white church on a hilltop. It’s

only a few miles away from Mystic, a popular tourist destination known for its charming 19th-century atmosphere. 

Both Mystic and Noank are part of the town of Groton,

and have gone from being sleepy, working- and middle-class

neighborhoods 40 years ago to fashionable haunts of the

rich. At the same time, the traditional industries of fishing,

oystering and lobstering declined drastically as marine

wildlife disappeared from the harbor. Now, among the luxurious homes and sleek yachts, some people are trying to

redevelop one of those industries.

Co-op breeds new oyster strain

The Noank co-op is headquartered in a building at the foot

of Noank’s three-block-long Main Street, on the waterfront at

the mouth of historic Mystic Harbor. Most of the building is

dedicated to a hatchery for oysters and other shellfish,

presided over by the co-op’s only full-time employee.

Through trial and error, the hatchery has developed a strain

of oysters that thrives in the harbor and has developed a reputation for quality among restaurateurs and other customers.

Rural Cooperatives met Jim Markow, president of the coop, on a foggy June morning. He was standing at a table

mounted on his boat tied up at the co-op dock, getting a

fresh catch of oysters ready for market. 

“Ya had breakfast yet?” he asks, as he deftly shucks three

oysters for his visitor. Despite a recent breakfast, the chance

to have oysters fresh out of the water is too good to pass up.

They are plump, juicy and very tasty. 

“I eat them all the time,” Markow says. “They’re the best

oysters you can get!” 

Markow is president of the small cooperative, which has

12 members, most of whom work part-time as oystermen,

and some who work only weekends. Some members operate

in Mystic Harbor; others from across Long Island sound on

Long Island.

22 July/August 2005 / Rural Cooperatives

No Shell Game

Oyster co-op hopes to revive

Mystic’s faded shellfish industry 

I

Jim Markow, president

of the Noank Aquaculture Cooperative,

with a day’s harvest of

oysters. USDA photos

by Stephen Thompson 
Rural Cooperatives / July/Augustt 2005 23

The Noank co-op is developing a

reputation for a high-quality product,

and its oysters even have a distinctive

appearance, with radial ridges on their

shells. The co-op sells as many oysters

as it can grow. The only thing holding

it back from greater sales is production

limitations. 

More production needed

Increasing production is a complicated problem, and members are working hard in anticipation of greater

returns in the future. Oysters are difficult to breed and raise to the size at

which they can be set out in the beds

(see sidebar). They take three or four

years to grow to marketable size,

lengthening the time it takes to get a

decent return on investments of time

and money. And there are countless

variables that must be dealt with —

not only from year to year, but, most

importantly, from one part of the harbor to another.

Steve Plant, another member of the

cooperative, says that the learning

curve is steep. “You’ve got to start slow

and go easy,” he says. “If I had known

what was in front of me ...well, I guess

I would have gone ahead. Because you

have to go through the pain. If it were

easy, a lot of people would be doing it.”

“Every day I learn something new,”

says Plant. “Stuff you thought would

work like a charm fails completely, and

accidents sometimes work better than

anything. But once you’ve got everything set, then you’ve got a cookbook.”

“You have to learn your area intimately,” he says. That’s partly because

conditions are different from one part

of the estuary bottom to another.

Plant’s oyster beds are exposed to more

current than some of the other members’, requiring him to grow his baby

oysters to a larger size before putting

them out. But he thinks the trade-off is

worth it, because with the current

comes more exposure to nutrients and

better flushing action to carry away

oyster waste.

Helping each other out

The cooperative is run informally

for the most part. “We get along with

each other and help each other out,”

says Plant. “I hope it stays that way.” 

If one member is short on product

for a customer, other members will

loan him some of theirs, and members

often assist each other with repairs and

other activities. For the present, the

spirit of cooperation seems to make

things work, and the co-op officers and

bylaws can settle any disputes.

The co-op is set up as a fee-based

operation. Members are obliged to buy

oyster “seed” — baby oysters — from

the co-op, and to sell through the

organization. 

Markow has been a waterman all his

life, and was a driving force behind the

founding of the co-op. He works full

time at his oyster business, along with

his business partner, Karen Rivara.

Together, he says, they have been able

to develop the business to the point

where it is profitable. 

Plant’s background is not on the

water, but on Wall Street, where he

used to work as an analyst for a hedge

fund. Tiring of his routine, he looked

for a new career that would get him

The Noank co-op grows algae under highly controlled conditions to feed baby and breeding oysters.
out of the office. When his boss sent the fund staff out

to look for investment opportunities in commodities

production, he looked into aquaculture, and was attracted by its possibilities. To start learning the business, he

got a job with a fish farm.

What he learned was not entirely encouraging. “I

found that not a lot of people make much money at

aquaculture. A lot of these ventures aren’t serious about

turning a real profit.”

While Plant was looking for a way to get an aquaculture operation going, he ran into a friend who introduced him to Markow, who was looking for recruits for

a new shellfish cooperative. 

The cooperative got its start after Markow was

approached by Roger Sherman, a retired engineer from

the nearby submarine shipyard at New London.

Sherman, a volunteer with the Groton Shellfish

Commission, was interested in reviving commercial

shellfishing in the Mystic. 

Vacated building offers home 

Sherman learned that an old building in Noank, then

used by the University of Connecticut as a marine

research laboratory, was being vacated. Originally built

at the turn of the century as a lobster hatchery, the

building had two stories (a third story was blown off by a

hurricane in the 1920s). It had 6,000 square feet of space

and a 120-foot-long dock. 

Sherman saw the old hatchery building as a terrific

opportunity. The Shellfish Commission not only leases

Mystic Harbor shellfish beds to commercial watermen,

but also maintains recreational shellfish beds in a nearby

cove, selling 2,000 recreational shellfishing permits a

year. Sherman figured that if the town could gain own24 July/August 2005 / Rural Cooperatives

Breeding oysters is a delicate task, says Stuart Mattison,

manager of the Noank Aquaculture Cooperative and head of

the co-op’s Noank hatchery. The conditions must be right

and, even then, success isn’t assured.

To ready adult oysters for breeding, they are put into flat

conditioning tanks, where they are kept for weeks at optimum temperatures, bathed in clean water from the harbor

and fed algae. The algae — four different varieties — is

grown on the premises under controlled conditions. 

Adults are then moved to another tank and the water temperature is raised to about 80 degrees to encourage spawning. Once one oyster begins spawning, the others, stimulated

by the hormones released, also spawn.

When spawning begins, the oysters are put into individual

plastic buckets, and the eggs and sperm they produce are

precisely mixed, with the goal of maximizing the number of

fertilized eggs. One female oyster can produce up to 30 million eggs.

The oyster larvae are incubated, hatched and nurtured in

vertical tanks with conical bottoms, with a steady stream of

air bubbles and feedings of algae. 

After a few weeks, the larvae are transferred to horizontal

trays to “set” — that is, to attach themselves to a bit of shell

or sand, and become sedentary. The trays have fine screen

bottoms covered with a thin layer of the sand, down through

which filtered harbor water is pumped. 

After the tiny oysters have grown to a certain size, they are

ready to be removed from the hatchery. However, before they

can be introduced to open water, they first must be nurtured

in floating nursery tanks moored in protected waters. 

The open-topped tanks contain modified plastic barrels

with screen bottoms in which the tiny oysters are confined

while being bathed in a constant upwelling flow of harbor

water, pumped through by an electric motor. The “upweller”

tanks are large fiberglass boxes originally used for holding

lobsters. PVC pipes are used to suspend the barrels in the

tank and carry the exhaust water out.

After the oysters have reached the correct size — about

the size of the tip of a man’s thumb — they are put out on the

beds, which have been prepared by cleaning away any silt or

other contaminants. Alternatively, some co-op members suspend their oysters in the water in cages. They are allowed to

grow for about three years, until they reach market size. 

An oyster dredge — basically a flat, steel basket about

one yard wide — is dragged along the bottom to harvest the

oysters. Before going to market, they are put in cages suspended in deeper water to depurate, or clean themselves

out, for a few weeks. Only after this final step are the oysters

ready to be processed for market. ■

Breeding and growing oysters

— easy does it 

Boats used by Connecticut members of the Noank cooperative tie up at the hatchery’s dock. Other members work out of

harbors on Long Island, across the Long Island Sound from

Mystic Harbor.
Rural Cooperatives / July/August 2005 25

ership of the building, it could lease it

for use as a hatchery to a shellfish business, in return for oysters and clams to

stock the recreational beds. He contacted Jim Markow, who expressed

immediate interest. 

Markow believed that other watermen in the area would be attracted to

the idea of a shellfish cooperative, and

the idea took off from there. Markow

began recruiting potential members

and Sherman went about obtaining the

rights to use the building.

The Commission put together a

proposal to turn the building

back into a hatchery and took it

to the chancellor of the university. However, while the marine

scientists who had used the building were enthusiastic about its

transformation into a shellfish

hatchery, the administration of

UConn was not. The university

wanted a financial return on the

building, which is located on

prime waterfront real estate. Half

a million dollars was the lowest

figure the university chancellor

was willing to entertain. It was

money the town just didn’t have.

The solution was a special

appropriation from the state legislature, obtained by the town’s

state representative, and a statute

reserving the building for aquaculture purposes. The university

was paid, ownership of the property transferred to the state agriculture department, and the

fledgling cooperative signed a

lease agreement. The upkeep and

maintenance of the building is overseen by the Shellfish Commission,

which keeps office space on the second

floor.

In August 2002, then-Secretary of

Agriculture Ann Veneman presented

the state of Connecticut with a Rural

Business Enterprise Grant from USDA

Rural Development for $63,000 to

replace the roof and upgrade the interior. The state is currently transferring

ownership of the building to the town

of Groton.

The co-op has another hatchery, as

well: on Long Island, run by Markow’s

partner, Rivara. Having two hatcheries

offers a fail-safe alternative if one

should be affected by disease or other

factors.

Sport fishermen feared impact 

Some of the biggest hurdles for the

co-op were getting the necessary permits, complicated by the fact that different government entities have jurisdiction over various aspects of the coop’s operation. But one obstacle came

from an unexpected quarter.

“Our biggest opponents,” says

Plant, “Were the anglers.” Perhaps

influenced by unfavorable publicity

about salmon farming, local sport fishermen were afraid that an oyster-growing operation would somehow hurt

their fishing. 

They needn’t have worried, says

Plant. “Oysters belong here,” he says.

“They used to grow wild here. We’re

just trying to restore old habitat for

them.” And in restoring oysters to the

harbor, co-op members believe they

are working for the return of other

estuarine wildlife that disappeared

years ago. A bumper sticker on Plant’s

car proclaims, “Oysters are Habitat

Forming.” 

“People don’t want to change anything,” says Plant, “But they don’t realize it’s already changed. We’re changing it back.”

Much of the reason oysters disappeared from the Mystic River estuary,

according to Jim Markow, is that a

development boom along the shore

destroyed vegetation that filtered silt

from runoff water. Silt chokes oysters,

which need clean sand or gravel bottoms to thrive. 

But other conditions in the harbor offered great potential, including

a healthy level of algae, which is the

food of oysters. “Look at that,” he

says, pointing to the water’s greenish

tinge. “See all that algae? That’s just

about perfect for raising oysters.” 

Preparing the co-op’s oyster beds

has meant tediously dredging the

harbor bottom to clean off sediment.

With the return of oysters, Markow

says, conditions improve for other

estuarine wildlife that also left. He

points out that in other areas fishermen seek out oyster beds because

they attract fish. 

Plant says he’s seen evidence of

the beneficial effect of oysters for

fish around his nursery tank. “You

can see the little baby menhaden (a

commercial fish) hanging around

where the water comes out. They

wouldn’t be doing that if the oysters

didn’t put something they like into

the water.”

Markow says that there is a certain

amount of tension between the watermen and the well-heeled outsiders who

have bought up most of the waterfront

property. He shakes his head. “These

guys are out here with their milliondollar yachts, and they don’t like seeing us because our boats are ugly.”

Good neighbors

But co-op members and others say

that most of the immediate neighbors

of the co-op are happy with it. “The

Co-op manager Stuart Mattison checks the water from

an oyster breeding tank for signs of spawning. Co-op

members fear that a proposal by the National Marine

Fisheries Service to declare oysters endangered on the

Atlantic Coast would put oyster hatching and growing

operations such as this one out of business. 

continued on page 35
By Gerald Ely,

Co-op Development Specialist

USDA Rural Development

(Pennsylvania)

Editor’s note: this article is based on a presentation the author made at the National

Value-Added Conference in Indianapolis,

June 16–17, 2005.

n paper, the concept of

what a cooperative is and

how a co-op operates is

fairly basic. But successfully developing and

launching a co-op — while not rocket

science — can be complex and daunting for those who have never been

through the process. Any number of

obstacles can derail a promising co-op

in its formative stages. 

A skilled, outside advisor (or agent)

can play a critical role in the development process. Advisors need to wear a

number of hats, but there is no universally accepted qualification skill set.

We in USDA Rural Development who

provide technical assistance to co-ops

try to regularly update the skills of our

development specialists to keep pace

with the evolving economy and technology. 

Co-op development agents must

also be reliable conduits to finding

more outside expertise, which may

include an attorney, accountant, economist, marketing specialist, environmental specialist, engineer or technical-process specialist. “People” and

communications skills are also needed

by development advisors.

The purpose of this article is to

provide an overview of the various

roles that an outside co-op development specialist needs to fill,

and some cautions regarding

conflicts of interest. 

Roles of an outside co-op

development specialist

• Educator — For many

producers, their knowledge

of cooperatives is centered

on the co-op failures they

have read about or, perhaps, experienced. But

there is so much more to

know. Cooperatives come

in all sizes, organizational and governance packages, and capitalization

structures. They perform widely different functions and provide a wide

array of products and services. They

suffer or prosper under widely different leadership capabilities. The role

of the outside agent as educator can

be critical to understanding opportunities and making good decisions.

They can also play a key role in

identifying prospective leaders from

within the ranks of the producers’

group.

• Technical Advisor — Closely related to the role of educator is that of

technical advisor. Much work can be

done with a steering committee to

develop knowledge of cooperatives

and provide guidance in cooperative

structure and governance to prepare

a committee to work effectively with

other important “outside agents,”

the attorney and accountant.

Cooperative development, like any

other business development process,

goes through several stages.

Informing and advising members

about development stages and

process can be important in co-op

success. Failure to adequately

address one phase can easily lead to

decisions that simply compound the

problem being addressed. 

• Advocate for co-op structure —

For many, the cooperative business

structure is a new concept. It is not

taught in our schools or in most universities. An outside agent can provide objective information about the

relative advantages and disadvantages

of cooperatives compared to other

business structures. Likewise, not

every situation is suited for a cooperative business structure. Use of a

cooperative structure that is inappropriate will likely be detrimental to

the project and its members and customers. 

• Champion/cheerleader for the

project — Cooperative development

specialists and publications often discuss the importance of a project

champion. This is a person who

serves the co-op on a regular — and

26 July/August 2005 / Rural Cooperatives

The inside scoop on outside help

Outside co-op development specialists

play crucial role for business launch

O Dan Schofer, co-op development specialist with USDA

Rural Development, works with a co-op of produce

farmers which is supplying school cafeterias in north

Florida. USDA photo
Rural Cooperatives / July/August 2005 27

often prolonged — basis to encourage, lead, promote, push and pull to

bring together (in a timely manner)

the various elements necessary for

success. The role of project champion is not a role of the outside advisor,

but rather the role of a local leader

(or two) who will ultimately become

part of the cooperative. However,

every successful cooperative development start involves a fair amount of

internal and external encouragement.

An outside agent can be effective in

developing confidence among project

participants that they have the ability

to effectively carry out a development

project.

An outside agent or advisor can

play an important role in gaining the

support of potential resource agencies, project partners or other supporters. In the case of cooperative

development, these agencies or individuals may not be familiar with the

cooperative business structure.

Objective information and education

about the cooperative form of business, cooperative governance, finance

and responsibilities of members and

the board of directors can be useful

in gaining their participation. 

• Objective observer (devil’s advocate) — This trait should be combined with all of those listed above.

The outside agent must be more

than an observer. The ability to

objectivity step back, observe, evaluate, process and use the vast array of

information one gathers in the co-op

development process is an important

part of successful development. 

Cooperative development initiatives are frequently born of desperation. When loss of a farm, a business or even a rural community

seems eminent, every idea is thought

of as a solution. The sense of

urgency cries out for shortcuts and

emotions run high. I have, on many

occasions, been called a “wet blanket.” But, experience has proven

over and over the need to be objective when evaluating needs, opportunities, business structure options,

potential benefits for participants

and the time required to implement

a plan.

Loss of objectivity results in unrealistic expectations and plans. The

goal of an advisor is to help a group

make sound decisions based on the

best information and analysis possible. A decision to not form a cooperative that has little opportunity for

success is still a success. We should

count successes, not cooperatives.

Evaluating qualifications

A big issue for members trying to

develop co-ops is how to evaluate the

capabilities of an outside agent. Brian

Henehan of Cornell University says,

“The level of professionalism and

competence can vary greatly among

those involved in advising a new startup business, including new cooperatives.”

In many cases, these advisors may

provide free service. They may be on

the staff of USDA Rural Development,

a university or cooperative extension

office, Small Business Development

USDA offers co-op development help

USDA Rural Development offers a wide range of technical assistance to developing cooperatives. This help can range from an initial feasibility study to the creation and implementation of a business plan and

bylaws. The goal is to provide a realistic view of what it will take to make

a new cooperative succeed.

Assistance is offered through USDA Rural Development’s national

office in Washington, D.C., (202) 720-3350, and most USDA Rural Development state offices. To be connected to your state office, call (202) 720-

4323, then enter “1” and follow the voice prompts. Or visit

www.rurdev.usda.gov and click on the “office locator” button. 

USDA also has a number of publications that should be read by

those forming a new cooperative. Most are in the Cooperative Information Report series, which are on-line at:

http://www.rurdev.usda.gov/rbs/pub/cooprpts.htm. For hard copies, email: dan.campbell@usda.gov, or call (202) 720-8381. ■

Co-op development specialists need to be objective observers. Here, a USDA development specialist works with board members of a women’s crab processing co-op on

Smith Island, Va. USDA Photo by Bob Nichols
Center, Cooperative Development

Center, Ag Innovation Center, state

department of agriculture or a local

economic development corporation.

But, “free service,” can become very

expensive if that advisor or agent delivers the wrong advice, has a bias toward

someone else’s priorities or puts someone else’s goals higher than the co-op’s. 

Weigh agent’s motivation 

Be cautious of “self-appointed” outside agents. What is their motivation

for wanting a cooperative business

started? How will they benefit? Does

their interest come with the potential

for personal benefit or gain?

28 July/August 2005 / Rural Cooperatives

Cooperative development practitioners associated with the Cooperative Development Centers, funded by USDA Rural Development, organized as a network called Cooperation Works in 1995. They

developed a set of professional standards called The

Madison Principles, so named because they were

drafted in Madison, Wis. These principles should be

studied by members of developing co-ops, and serve

as a reminder for co-op development specialists. 

The Madison Principles

Professional Standards for Cooperative Development Practitioners

1. Individuals providing technical assistance subscribe

to the highest level of ethics and shall declare any

conflict of interest, real or perceived, so that they

can be a credible source of objective feedback and

an articulate advocate of the project as needed.

2. Cooperatives are tools for development and should

promote both social empowerment and economic

goals.

3. Applied appropriately, cooperatives have value to all

population groups and for all businesses and services in the public and private sectors.

4. Each cooperative responds to its unique economic,

social and cultural context; as a consequence, each

cooperative is different.

5. There are essential steps that must be taken in a

critical path to succeed.

6. An enthusiastic group of local, trustworthy leaders is

a prerequisite for providing technical assistance.

The effective cooperative development practitioner

nurtures that leadership by helping them shape a

vision that will unite members and provide ongoing

training.

7. Cooperatives only work when they are market driven; the development practitioner seeks to ensure

that accurate market projections precede other

development steps.

8. Member control through a democratic process is

essential for success.

9. Success also depends on the commitment of the

member’s time and financial resources.

10. There must be tangible economic benefits for

members.

11. The cooperative’s products and services must generate sufficient revenue so that the effort can be

financially self-sustaining. Provisions must be

made to share any surplus revenue.

12. Market opportunities exist throughout the world.

Cooperatives and market development should transcend national boundaries.

13. Successful, established cooperatives should assist

emerging cooperatives to develop. New and

emerging cooperatives should be encouraged to

communicate with and learn from successful cooperatives. ■

Co-op development training

slated for Madison in November

Cooperation Works is sponsoring the second of two,

five-day training workshops for co-op development specialists, Nov. 14-18 in Madison, Wis. The first session of

The Art & Science of Starting a Cooperative Business was

held last May. The program is the most comprehensive

training program on the development of cooperative businesses available in the United States, bringing together

proven experts and co-op leaders from across the country

to deliver the best of what has been learned in cooperative business development to new practitioners in the

field. Best practices case studies using various types of

cooperatives will be incorporated into the classes.

Participants who missed the first part can still enroll

in the November session, but should call the Cooperation

Works office first. The training program was launched 

in 1999, and was re-tooled and updated last year in collaboration with the University of Wisconsin Center for

Cooperatives. For more information, visit: 

www.cooperationworks.coop, or call (307) 655-9162, 

or e-mail cw@vcn.com. 

Cooperation Works was found in 1997 by eight co-op

development centers, and has since grown to 21 centers

serving 43 states. It promotes business development in

all co-op sectors by sharing best practices and lessons

learned. ■

Cooperation Works 

continued on page 38
Rural Cooperatives / July/August 2005 29

By Eldon Eversull, ag economist

USDA Rural Development 

Editor’s note: Information for this article is

from a soon to be published Research

Report 207.

gricultural cooperatives

sold about $7 billion in

feed in 2004, more than

double the sales value

reported in USDA’s last

study, conducted in 1984. Many

changes have, of course, occurred during the past 20 years for cooperative

feed manufacturers. Six of the major

cooperative feed manufacturers no

longer exist. However, their manufacturing facilities have not been lost.

Prior to ceasing operations, alliances

were developed with other cooperatives to incorporate most of the feed

mills into existing cooperatives. 

This consolidation and expansion

trend continued until one cooperative

became the leading cooperative feed

manufacturer. This same cooperative

purchased a major investor-owned feed

manufacturer and has become the

largest U.S. feed manufacturer. Also,

one large cooperative feed manufacturer converted to an investor-owned

firm. 

The more than doubling in the dollar amount of feed sales for cooperatives over the past 20 years is thus the

result of a combination of business

expansion, purchase of an investorowned feed manufacturing firm and

increased ingredient costs, minus the

loss of the cooperative that converted

to an investor-owned firm, among

other such changes. 

USDA survey

USDA Rural Development sent a

survey to 646 cooperatives that had at

least $500,000 in feed sales in any of

the prior five years. There are many

more cooperatives that sell feed, but

few of these with less than $500,000 in

sales had feed mills. About 33 percent,

or 220, usable surveys were returned. 

Among the major changes since the

1984 survey is that hog production

continues to be concentrated in larger

farms and vertical integration continues among feed production, hog production and meat packers. Hog production has also seen movement from

traditional production areas of the

Corn Belt, Lake States and Northern

Plains to Appalachian, Southeast and

Mountain states, much of the migration being driven by pollution and

odor issues. 

Global markets have also opened

U.S. borders to meats produced overseas. Bovine spongiform encephalopathy (BSE), or mad cow disease, has

closed the U.S./Canadian border several times to importation of live animals and has impacted export markets.

Avian flu has had a large impact on

foreign poultry production and could

become a major domestic concern.

The large increase in ethanol production has made distiller’s grain (an

ethanol byproduct) a competitive

choice to traditional feed production.

Survey highlights

The survey found that:

• The Corn Belt and Lake States

account for 80 percent of cooperative feed production; 

• Types of feed and percent of total

production by co-ops are: complete feed — 83 percent; supplement feed — 12 percent; premix

feeds — 5 percent;

• Feed sold in bulk accounts for 90

percent of feed sales, while 10

percent is still sold in bags.

• Meal was the most common form

of feed produced by co-ops (72

percent of the total); pellets were

second (14 percent), followed by

coarse-textured (11 percent), liquid (2 percent), cubes (1 percent)

and blocks (0.4 percent).

Consolidation, expansion spark 

growth in cooperative feed sales

A

Co-op feed sales have more than doubled

in the past 20 years, according to a new

USDA survey. USDA Photo by Ken

Hammond
• Hog feed was by far the biggest

share of the market, accounting

for 53 percent of co-op feed production, followed by dairy feed at

17 percent and beef feed at 14

percent.

• Over half of the feed produced

was sold at the retail level, while

17 percent was sold wholesale; 15

percent was custom grind and

mix; 9 percent was custom fed to

others’ animals; and 6 percent was

fed to animals owned by the cooperative.

Complete, supplement 

or premix feeds

Formula feed is produced according

to exacting specifications to satisfy different animal groups’ physiological and

environmental needs. Feed production

is usually classified further into specific

feed types, such as complete, supplement and premix. Comparing 2004 to

1984, we can see that complete feed

production rose about the same

amount as supplement feed declined

(chart 1). By region, complete feed

production increased greatly over the

1984 average of 74 percent in all but

the Northeast, Lake States and

Southeast. 

By feed mill size: mills producing

from less than 999 tons to 74,999 tons

annually produced complete feeds

about 70 to 79 percent of the time.

Feed mills producing from 75,000 to

99,999 tons produced more supplement feed (30 percent) and less complete feed (65 percent). Production at

feed mills with a volume of more than

100,000 tons also differed from the

average, with more than 90 percent

complete feed and only 6 percent supplement feed.

Feed type

In 1984, the use of pellet feed had

increased greatly from prior studies,

accounting for about half of total feed

production. By 2004, pellet feed

dropped to 14 percent of total production while meal climbed to 72 percent

and coarse-textured 11 percent (chart

2). This compares to 49 percent meal

in 1984 and 47 percent pellets. Meal

production increased in the Corn Belt,

while pellets increased in the Southeast. Much of this apparent drop in

pellet feed may be due to several larger

cooperative feed manufacturers not

responding to the survey.

Feed mills with less than 999 tons

of production made about equal

amounts of meal and coarse-textured

feed. They also made the most liquid

feed. Feed mills with 10,000 tons to

74,999 tons of production made about

the average amount of meal feed, 70

percent. Feed mills with 75,000 to

99,999 tons of production made the

most pellet feed (32 percent). 

Animal type

Hog feed accounted for 53 percent of

the feed produced by respondents, while

dairy feed was the most-produced feed

in the 1984 survey (chart 3). Hog feed

was the most-produced feed in the Lake

States, Corn Belt, Northern Plains and

Mountain regions while beef feed was

the most-produced feed in the Southern

Plains and Pacific regions. Dairy feed

was the most-often-produced feed in the

Northeast, Appalachian, Southeast and

Delta regions. 

Hog feed was the most-often-pro30 July/August 2005 / Rural Cooperatives
Rural Cooperatives / July/August 2005 31

duced feed for feed mills with annual

production from 25,000 tons per year

to over 100,000 tons. Feed mills with

a volume of less than 999 tons per year

to 9,999 tons focused on beef feed.

Feed mills producing between 10,000

tons per year and 24,999 were about

evenly split between hog and dairy

feeds. 

Feed distribution

By a large margin, respondent

cooperatives distributed the feed they

produced through retail sales (chart 4).

This is very different from the distribution pattern found in 1984, in which

wholesale sales and retail sales were

about equal. Again, several large

cooperatives that did not respond to

this survey have feed sales that are

known to be heavily weighted toward

wholesale sales and thus may have

skewed survey results.

Retail sales increased by about 20

points over 1984 while wholesale sales

dropped about the same amount.

Custom-grind and mix feeds dropped

six points, as did feeding to cooperative-owned animals. Feeding to others’

animals (custom fed in feed lots or

confinement facilities) grew by almost

nine points. Retail sales accounted for

at least 90 percent sales in the

Northeast, Appalachian, Delta,

Southern Plains and Pacific regions.

Feed mills with production of less

than 999 tons per year almost exclusively relied on retail sales. Feed mills

producing from 75,000 to more than

100,000 tons per year relied on wholesale sales about 24 percent of the time.

These same feed mills also custom-fed

their feed to others’ animals for more

than 10 percent of their feed sales. ■

The farm-production

regions referenced in

this article are 

as follows: 

Northeast: Maine, N.H., Vt., N.Y.,

Mass., R.I., Conn., Pa., N.J., Del., Md.

and D.C.;

Lake States: Mich., Wis. and Minn; 

Corn Belt: Ohio, Ind., Ill., Iowa 

and Mo.; 

Northern Plains: N.D., S.D., Neb. 

and Kan. 

Appalachian: Va., W.V., Ky., TN 

and N.C.; 

Southeast: S.C., Ga., Ala. and Fla. 

Delta States: Miss., La. and Ark.; 

Southern Plains: Okla. and Texas; 

Mountain: Mont., Idaho, Wyo., Colo.,

Utah, Nev., Ariz. and N.M.; 

Pacific: Wash., Ore., Calif., Hawaii

and Alaska. 
32 July/August 2005 / Rural Cooperatives

or her “drive, wisdom

and relentless pursuit of

excellence,” Janet H.

Schoniger, vice president

of corporate communications for CoBank in Denver, Colo., has

been named the 2005 winner of the

H.E. Klinefelter Award, the highest

honor bestowed on a cooperative communicator.

Terri Faulkner, communications coordinator for

Dixie Electric Cooperative,

received the Michael

Graznak Award, which recognizes the outstanding

young co-op communicator (under 36) of the year.

The awards were presented

at the annual institute of

the Cooperative Communicators Association

(CCA) in Denver, Colo., 

in June. 

Schoniger is the 47th

recipient of the Klinefelter

award, which recognizes contributions

in furthering the cooperative system

and for raising the standards of cooperative communications. She was recognized for the key role she plays in

ensuring CoBank’s communications

advance the bank’s mission and vision. 

Schoniger focuses on communication efforts that support CoBank’s

strategic plan, and even coined the

bank’s tagline, Rural America’s

Cooperative Bank. She is active in CCA,

where she is past committee chair of

the CEO Communicator of the Year

award, and the National Council of

Farmer Cooperatives.

Faulkner is responsible for all

aspects of her 18,000-member cooperative’s communications, including publications, media relations and Web

sites. She also handles cooperative

advertising and is responsible for all

school programs, community and public relations and special projects.

Faulkner was saluted for “demonstrating the seven

cooperative principles in her work

ethic and attitude

on a daily basis,

and for bringing

creativity and a

high level of professionalism into

all the communications efforts.”

CCA’s annual

cooperative communications

competition

attracted nearly

800 entries in

four classes:

writing, publications, photography and

programs & special projects (the latter

of which includes everything from

advertising to web sites). The grand

award winners in each class were: 

• Writer of the Year – (tie) Allison

Morgan and Mark E. Johnson, both

of Tennessee Farmers Cooperative;

• Photographer of the Year – Robin

Conover of the Tennessee

Association of Electric Cooperatives;

• Publication of the Year – Bonnie

Jones of Jackson Electric

Membership Corporation for its

2004 annual report. 

• Special Projects, Best of Class –

Joseph W. Richardson, Southwestern

Electric Cooperative, for a “smallshop portfolio” of communications

work.

USDA’s Rural Cooperatives magazine

won the first place feature article

award from a field of nearly 50 entries

for “Flying the Coop,” by Catherine

Merlo, which addresses

strategies for retaining co-op

members. It also won third

place for best overall member magazine or newspaper,

while Stephen Thompson,

the magazine’s assistant editor, won the third place

award for digitally manipulated photos for an illustration/photo showing a farm

inside a bank vault. For the

complete list of award winners, visit: www.communicators.coop. 

CCA is a national organization of more than 350 professional communicators who

work for cooperative businesses and

organizations throughout the United

States and a number of other nations.

For more information, visit the Web

site above or call Executive Director

Susie Bullock in Lubbock, Texas, at

(806) 795-2783. 

■

CoBank’s Schoniger named 

top co-op communicator 

F

Janet Schoniger of CoBank.

Terri Faulkner of Dixie Electric

Cooperative.
Rural Cooperatives / July/August 2005 33

Pennsylvania food-marketing co-op 

completes trade mission to China 

The Food Marketing Cooperative

of Pennsylvania (FMCP) — a joint

effort of small to medium-sized food

processors — recently completed their

first trade mission to China. The trade

mission, coordinated by the

Pennsylvania Department of

Agriculture (PDA), represented 13

food manufacturers who have found

that leveraging their resources helps all

of them reach markets that almost

none of them could access individually. 

“This trip was a real team effort by

the members of the co-op, the state

and the U.S. Department of

Agriculture (USDA),”

Pennsylvania Agriculture

Secretary Dennis Wolff said, noting that many of the trip’s costs

were offset by a grant from

USDA. The co-op had an exhibit

at the HOFEX Food Show in

Hong Kong and participated in

retail tours. 

“Pennsylvania cannot ignore

China’s market potential for

many of the same foods our own

citizens have come to enjoy,”

Wolff said. “This trade mission

was extremely important in providing exposure for the commonwealth’s food products while developing relationships with quality

importers and distributors in China.” 

Ron Davis of Bell Export Foods

Group, representing members of

FMCP, joined John Jantos, PDA’s international business development division

chief, during the week-long trip to

Hong Kong and southern China.

During the mission, the pair participated in market briefings by the U.S.

Embassy and Consulate. They also

gained insight and perspective into the

Asian market through a trade show in

Hong Kong and meetings with buyers,

importers and distributors there and in

the southern Chinese city of Shenzhen. 

“With a population of more than 1

billion people, there is tremendous

market opportunity for Pennsylvania’s

diverse array of quality agricultural

products in China,” Wolff said. “This

trip was a great step forward in creating relationships that will soon add

China to the growing list of countries

purchasing Pennsylvania’s agricultural

products.”

The co-op’s expenses for the trade

mission were partially offset through

use of the Market Access Program

(MAP) of USDA’s Foreign Agricultural

Service. MAP funds are available

through four State Regional Trade

Groups (SRTGs), which consist of

state departments of agriculture. The

SRTGs work closely with USDA to

promote international trade. This program can reimburse businesses for up

to 50 percent of their international

promotion expenses.

In this case, Food Export USANortheast, the SRTG which represents

ten northeast state departments of

agriculture and the Mid-America

International Agri-Trade Council

(MIATCO), which represents 12

grain-producing states, collaborated on

the China mission to benefit the co-op

and several other agribusinesses from

other states.

Alto forms whey-marketing

partnership 

Alto Dairy Cooperative, Waupun,

Wis., has formed a marketing alliance

with Main Street Ingredients,

LaCrosse, Wis., to sell its dried whey

and permeate to the nutritional and

food-processing industries. The

arrangement will not affect Alto’s feed

divisions. “By marketing our dried

whey and permeate through this partnership, Alto will be able to capitalize

on Main Street’s sales and marketing

expertise — adding value to our members’ milk,” said Rich Scheuerman,

President and CEO of Alto Dairy

Cooperative. 

NEWSLINE

Compiled by Dan Campbell

Send items to: dan.campbell@USDA.gov

Correction

In the May–June issue of Rural

Cooperatives, an article about

Cooperative Agricultural Services’ new

soybean extruder incorrectly stated that

the operation is located in South

Dakota. It is actually located in Kansas.

The state agency that worked closely

with the co-op to develop the facility is

the Kansas Department of Commerce. 

Fred Detrick displays a co-op poster that graced

New York City buses in the 1960s. Tru-Blu Blueberry Co-op, founded in 1928, recently closed its

doors. Photo by Larry Hajna, courtesy Camden CourierPost 
34 July/August 2005 / Rural Cooperatives

The partnership is one of several

initiatives Alto is working on to bring

higher margins and add value to the

cooperative and members’ milk,

Scheuerman said. In April, Alto

announced its partnership with

Winona Foods to brand and market its

aged cheddar cheese nationally. 

In other news, Alto recently hosted

the national Food Network television

show “Unwrapped,” at its Waupun,

Wis., plant, where it was featured in a

special segment on

food toppings. The

show focused on Alto’s

shredded cheesemaking process and its

110-year history as a

producer-owned cooperative. Hosted by

Marc Summers,

“Unwrapped” uncovers behind-the-scenes

details on classic

American food by

exploring test kitchens

and the secrets behind

food companies and

their products. 

Alto Dairy manufactures more than

550,000 pounds of

American and Italianstyle cheese per day at its Waupun and

Black Creek facilities from a daily

intake of more than 5 million pounds

of milk. Cheese and whey produced by

Alto Dairy are marketed nationwide

under a variety of brand names and

private labels. 

Aurora Co-op buying

Cargill’s Grand Island mill

Aurora Cooperative is buying

Cargill’s Grand Island, Neb., feedmill.

“This acquisition is a wonderful

opportunity as it allows Aurora

Cooperative to upgrade its feed services to current and future livestock

producers,” says Aurora Cooperative

President and CEO George

Hohwieler. 

The purchase comes on the heels of

the co-op’s 2005 board retreat, where

the directors “committed to be actively

involved in the feed business for the

long term,” Hohwieler said. The

acquisition also favorably positions

Aurora in response to USDA’s and the

U.S. Food and Drug Administration’s

niche marketing is a viable alternative

for interested farmers.

Synergy with established

cooperatives

Most of the newer niche-marketing

cooperatives continue to sell the bulk

of their milk to other handlers. They

direct just a portion of their milk to a

plant to have their specialty products

made. 

For some, these shipments for their

niche products are only done occasionally. Others ship all their milk to their

handler (typically a cooperative) and

“buy back” the amount of milk needed

to make their specialty product. In this

case, the handler diverts shipments of

the niche marketing cooperative members’ milk to the selected plant. 

These arrangements give the members market security (a market outlet

for all of their farms’ milk). At the same

time, it allows them to seek added

returns on a portion of their milk.

The relationship between these new

niche-marketing cooperatives and

established cooperatives appears mutually beneficial. The niche-marketing

cooperative can focus its efforts on its

niche products, leaving the tasks of

managing milk routes, producer payroll and balancing milk supplies to the

larger cooperative. 

The established cooperative benefits

by having members who, due to the

added revenue they gain from their

niche products, are thriving and happy

members. Moreover, the established

cooperative gains another outlet for

member milk, however small.

References

Cheese Market News, Midwest

Education Program Raises Awareness

of Organic Farming, Seeks Interested

Parties, pg. 10, Vol. 25, No. 12,

April 22, 2005.

Elitzak, Howard. Food Marketing

Costs at a Glance. Food Review,

Economic Research Service, USDA,

Vol. 24, Issue 3, SeptemberDecember 2001.

Liebrand, Carolyn. Financial Profile

of Dairy Cooperatives, 2002, Research

Report 203, Rural BusinessCooperative Service/USDA,

September 2004.

Liebrand, Carolyn. Structural

Change in the Dairy Cooperative

Sector, 1992-2000. Research Report

187, Rural Business-Cooperative

Service/USDA, October 2001.

Ling, K. Charles. Marketing

Operations of Dairy Cooperatives,

2002. Research Report 201, Rural

Business-Cooperative

Service/USDA, February 2004.

■

Bucking the trend continued from page 17

Alto Dairy’s shredded cheesemaking process was recently featured on the Food Network’s “Unwrapped” program. Photo courtesy Alto Dairy 
Rural Cooperatives / July/August 2005 35

stance on species-segregated feed manufacturing operations, he noted. In

conjunction with the asset sale at

Grand Island, Cargill Animal

Nutrition announced that it will double production at its Duncan, Neb.,

location.

Bin collapse causes

co-op to halt storage 

Central Valley Ag Co-op is closing

its grain storage facility in Fremont,

Neb., but will continue to offer

agronomy and petroleum services,

according to the Fremont Tribune. In

November, one of the co-op’s grain

bins collapsed, and the Nebraska

State Fire Marshal’s office and the

co-op’s insurance firm said the storage bins and the feed mill were a

safety hazard.

At one time the local co-op provided storage for some 500,000 bushels of

grain. But last November, a 50-yearold storage bin housing some 70,000

bushels of corn collapsed, spewing

grain into the loading area. Metal

fatigue is the suspected cause.

Rebuilding the storage facility and

upgrading the feed mill would be costprohibitive, so the board chose to close

them. The co-op will offer members

the option of shipping grain to terminal elevators under the co-op’s name,

or it will pick grain up on members’

farms.

Calif. dairy co-op

buying Frito plant

California Dairies Inc., Artesia,

Calif., is in the process of buying the

280,000 square-foot Frito-Lay plant in

Visalia that was closed last fall. The

final proposal is subject to the approval

of the cooperative’s membership. The

purchase is also contingent on the

city’s permission to build towers taller

than 100 feet, as well as on receipt of a

conditional-use permit. 

The facility may start producing

toward the end of 2007. In the first

have supported many research projects

that advance processing technology

and product development. However,

only through a cooperative’s own proprietary research and development

efforts can it identify and fully grasp

market niches and bring new products

to the market. 

New products may be developed by

modifying the flavors, taste, colors,

forms, packaging or shelf-life of existing products, or by fortifying them for

desired functionality. Product development also refers to using dairy ingredients (or dairy products as ingredients)

to develop or improve existing foods

and beverages.

Marketing new consumer products

requires market research, test marketing, advertising and promotion, consumer education, shelf-space acquisition, merchandising and servicing the

products. Substantial costs are associated with each of these activities. In marketing new dairy ingredients, the challenge is to provide end-users (processors) with information on the attributes, the functionality and the application of the ingredients.

To differentiate value-added products and gain competitive advantages,

cooperatives also must devote adequate resources to develop or acquire

processing technology and adopt new

ways to manufacture or package products, or to enhance the particular

attributes of their products. The

other aspect of processing technology

development is finding new ways to

make existing products, such as the

wheyless process for making mozzarella cheese. ■

New technology: are co-ops ready? continued from page 19

old-timers around here are all for the

operation,” says Roger Sherman.

“They understand that oysters help the

water quality.” 

Co-op member Artie Valdez

believes in keeping the neighbors

happy. So, he recently took a day off to

clean up weeds and brush around the

building. “The local people have been

really helpful,” he told me. “We were

strangers at first, but we’ve gotten to

know and trust each other.” 

Valdez grew up in the Groton area,

and says he has had a passion for the

outdoors and the water all his life.

After a term in the military, he

returned to the area in 1990 to settle

down. For a while he worked as a civilian at the local naval base, but after the

unit in which he worked shut down in

1993, he tried commercial fishing,

starting a firm he named “Sweet Pea

Enterprises,” after his oldest niece’s

nickname. “I made ends meet, but not

much more,” he says.

In 1999, Valdez was talking to Jim

Markow and brought up the difficulty

of working on the water alone. The

two started working together, and

when the idea of a co-op came up, he

says, “I thought it was a great idea.” 

Valdez especially likes the way coop members support each other. “We

all offer to do stuff for each other,” he

says. “That’s the whole idea of a cooperative. It’s a great feeling, working

together.” 

Valdez says his operation is finally

starting to pay off. “It’s been a long

road,” he says, echoing Steve Plant’s

sentiments: “You never stop learning.”

He also hopes to be able to hire

more people and provide them with a

way to earn income. While he’s not

able to do that yet, he’s confident that,

with continued hard work, Sweet Pea

Enterprises and his fellow members’

businesses will continue to grow. ■

No shell game continued from page 25
36 July/August 2005 / Rural Cooperatives

phase, 5 million pounds of milk per

day would be processed, and 100

workers would be employed at full

production. In the second phase, the

plant capacity could increase to 10

million pounds of milk per day and

employ as many as 180 workers. 

California Dairies’ 680 members

annually produce more than 14 billion

pounds of milk that accounts for 40

percent of the state’s production. The

cooperative is buying the plant to keep

up with its members’ milk production

growth of 3 to 4 percent per year.

Visalia is in Tulare County, which had

$1.4 billion in milk sales in 2004, making it the No. 1 milk-producing county

in the country. 

CF Industries plans stock sale

CF Industries Inc., a Long Grove,

Ill.-based manufacturer and distributor

of nitrogen and phosphate fertilizer

products, plans to raise $700 million in

an initial public stock offering. CF

Industries is owned by eight farmer coops: CHS Inc., MFA Inc., Growmark

Inc., Southern States Cooperative,

Land O’Lakes, Tennessee Farmers

Cooperative, Intermountain Farmers

Association and Cooperative Federée

de Quebec. 

The owners of CF Industries would

receive shares of common stock in the

new company and cash in exchange for

their outstanding equity interests in

CF Industries. CF had an operating

loss of $311.3 million in 2004. 

If approved by the U.S. Securities

and Exchange Commission, CF

Industries Holdings Inc. would be

formed to serve as the holding company for the operations of CF Industries

Inc. Morgan Stanley & Co. Inc. and

J.P. Morgan Securities Inc. will serve as

joint lead managers in connection with

the offering. Credit Suisse First

Boston LLC and Harris Nesbitt Corp.

are serving as senior co-managers.

CHS sells Mexican foods operations

CHS Inc. recently sold its tortilla

and chip operations to Gruma

Corporation. The sale consists of three

plants, located in New Brighton,

Minn., Fort Worth, Texas, and

Phoenix, Ariz. The plants employ

about 250 employees. Gruma is a subsidiary of Gruma SA de C.V., of

Monterrey, Mexico, which markets

products under the Mission and

Guerrero names. 

“As we looked at the future direction of our operations and our investment in the value-added food sector,

we concluded that it is in the best

interest of all of our stakeholders that

we divest of our Mexican foods operations and focus on other areas of our

food and grain processing business,”

said John Johnson, CHS president and

chief executive officer. “CHS remains

committed to its vision of linking producers to consumers through its other

grain-based food processing and manufacturing businesses.” 

Co-op conference 

slated in Minnesota

“Cooperative Opportunities in a

Global Economy” is the theme for the

8th annual Farmer Cooperatives

Conference, to be held Nov. 7-8 at

the Hyatt Regency in Minneapolis,

Minn. The conference has been sponsored since 1998 by the University of

Wisconsin Center for Cooperatives to

provide co-op directors, managers,

government officials and academics

with information on major trends and

issues impacting agricultural cooperatives. Presenters and topics are selected to stimulate critical thinking and

the exchange of ideas. The conference

includes ample opportunities for

interaction and discussion. For more

information, visit:

www.wisc.edu/uwcc/fc/

fc.html, or call (608) 262-3981. 

$10,000 land stewardship

prize offered by AFT 

Nominations are being accepted

through Nov. 1 for American Farmland Trust’s 2006 Steward of the Land

Award. The $10,000 prize is presented

annually to a farmer or rancher who

best exemplifies AFT’s mission of

stopping the loss of productive

farmland and promoting farming

practices that lead to a healthy

and 

c) Income from the production

(but not the transmission or distribution) of electricity, natural

gas and potable water is included.

Special rules for cooperatives

Congress wrote special rules into

the new law to make sure cooperatives

aren’t disadvantaged in their treatment compared to other types of

businesses:

a) When computing their Qualified

Production Activities Income

(step 2 above), cooperatives do

not need to take into account

their deduction for qualified

patronage refunds and per-unit

retains.

b) Agricultural and horticultural

cooperatives may pass through

some or all of their QPAI

deduction to their patrons. The

cooperative must provide a written notice to its patrons explaining the pass-through within the

applicable payment period.

This deduction is not simple, but it

does offer a significant tax savings to

cooperatives and other businesses that

manufacture, produce, grow or extract

hard products within the United

States. Managers, directors and advisors are urged to study this new tax

provision and incorporate it in their

future business and tax planning

efforts. ■

Legal Corner continued from page 21
Rural Cooperatives / July/August 2005 37

environment. Nomination kits can be

requested by calling (800) 886-5170,

extension 3011, or can easily be

downloaded on AFT’s Web site:

http://www.farmland.org/

steward/nomination_instructions.pdf .

The 2005 Steward of the Land

Award was recently presented to

Steve Sinton, a wine grape grower

and fourth-generation cattle rancher

from Shandon, Calif. Throughout his

18,000 acres of ranchland and 125

acres of vineyards, Sinton uses a variety of innovative practices to promote

sustainability and protect the environment. His efforts have even

resulted in the reintroduction of the

California condor, which nest on

parts of his property. He was also

instrumental at the state level in the

creation of the California Rangeland

Trust, California’s statewide agricultural land trust. 

“The Steward of the Land Award

showcases the diversity of American

agriculture and illustrates the many

benefits farmers and ranchers provide

to the general public, like habitat for

wildlife, a filter for clean air and water

and scenic vistas,” said Sinton. 

“I’m a rancher, but I know that past

winners of this award have also been

grain growers, dairy farmers and fruit

growers. There are people in every

aspect of agriculture that are engaged

in good stewardship practices.” 

Dairy conference eyes

national marketing agency

Farmers should take advantage of

the Capper-Volstead Act and form a

nationwide marketing agency-in-common to manage milk shipments and to

allocate milk to end users in the most

efficient manner possible, some speakers said during a recent dairy confereries more accurately than can a

processor buying cattle on the open

market. Still, farmers who have spent

their lives thinking of the processing

plant “as the enemy” have had some

difficulty thinking of the plant they

own as “us.” 

The co-op hopes its strategy of

transparency in its dealings with members and not “painting rosier pictures

than reality” will pay off with members. Honesty and openness are, after

all, a basic foundation of the cooperative movement.

The new plant has a supply agreement with Co-op Atlantic, which

makes the Atlantic Tender Beef brand

exclusive to co-op stores. That will not

prevent it, however, from providing

other house brands to other retailers,

selling to the food service industry or

seeking specialty or niche markets.

Expanding beef traceability 

There are other challenges and

opportunities facing the industry.

While ATB is traceable to its point of

origin, traceability ends when it arrives

at the plant door. Baglole says the coop is in negotiation with the Canadian

federal government to find funds to

add traceability technology to the

plant, which would be a big advantage

in promoting their products. 

“It’s not just food safety that this

would help,” Baglole says. “We would

be able to look at which type of animal

sells better, which cuts sell faster and

share the information back with the producer. It would make us more responsive to what the consumer wants.” 

This initiative will not solve all the

problems facing beef farmers. BSE and

other problems could continue to create

havoc for the foreseeable future. But it

does point to a long-term way out.

This marketing effort is not limited

to beef. The co-op also markets

Atlantic Tender Pork and Chicken.

There is a range of Market Town

house label products that are locally

sourced. These products are all part of

the co-op’s agri-food strategy that supports Co-op Atlantic’s goals of: 

integrating agriculture production into

its retail merchandising strategies;

generating and retaining wealth in the

communities of Atlantic Canada;

differentiating the co-op from the

competition.

The programs are variously

described as “farm-to-fork,” “gate-toplate,” “stable-to-table” or “from the

farm family to your family.” The programs are intended to offer both farmers and consumers — everyone in

Atlantic Canada — a local alternative

for goods and services needed if they

are to live in viable, healthy communities. The aim is to seek win-win solutions to challenges, such as Atlantic

Tender Beef, where both consumers

and farmers support each other.

Given the push towards market

globalization, some assume that it is

inevitable that huge multinational

corporations will control every facet

of the economy. But when there is a

commitment to find innovative methods for solving the challenges faced

by locally owned enterprises, everyone benefits: local producers, consumers, communities and the entire

co-op system. ■

Atlantic tender beef continued from page 11

Cattle rancher and grape grower Steve

Sinton of Shandon, Calif., won the 2005

Steward of the Land award. Photo courtesy

American Farmland Trust 
38 July/August 2005 / Rural Cooperatives

ence in Syracuse, N.Y. “Growing the

Northeast Dairy Industry” was the

theme of the conference, held June 1. 

New opportunities in the cheese

and fluid markets were discussed, and

young producers saw promising futures

in dairy farming, especially in Western

New York. 

However, dairy farming challenges

were also discussed, including: environment (air, water, odors, flies,

pathogens, etc.), animal welfare concerns, food safety, milk quality, efficiency and production costs, decreased

government involvement, international

competition, and financing. 

Diamond Walnut to convert 

After functioning as a growerowned co-op for nearly a century,

Diamond Walnut members have voted

to convert the business into an

investor-owned corporation. About 80

percent of the co-op’s 1,735-members

voted for the conversion of the company, which will become Diamond Foods

Inc. 

“We are gratified by the high level

of grower support,” said Michael

Mendes, president and chief executive

of Diamond. 

The initial public offering may sell

5.3 million shares at $15 each, possibly

raising $70.9 million. Money will be

used to create new products and markets to address increasing walnut production and more competition. 

Production for Diamond’s members

has grown about 65 percent over the

past seven years, according to

Diamond’s prospectus, due to factors

such as higher yields per acre and better varieties. 

The company, citing a more competitive environment, also wants to

work better with large customers such

as McDonald’s, which uses Diamond’s

walnuts in its fruit and walnut salad,

The Fresno Bee reported. ■

Many failed businesses can recall

the equipment sales person who

thought it would be great to build a

processing plant on the edge of town.

They had the feasibility study to

demonstrate that it could work, but

was that study tilted by someone who

had a vested interest to see a plant

built?

There are also project champions

who may see themselves fitting nicely

in the position of general manager of a

new co-op, which can clearly constitute a conflict of interest. This is similar to the issue we see arising in some

co-op sales or conversions when management has a vested, financial interest

in convincing the board and members

to sell or convert their co-op. 

The potential for such conflicts of

interest should be revealed by any

outside advisor involved in a project.

Some behavior, especially among

attorneys, bankers and others, is

addressed by legal or regulatory

guidelines. However, behavior of any

co-op development advisor must

adhere to the highest ethical standards. 

Timing issues

• When is an advisor’s assistance

needed? Timing of assistance to

developing cooperatives is important. The appropriate advice at the

appropriate time is the goal.

Understanding the development

process, recognizing the skills that

exist and the needs for assistance and

arranging a team of advisors should

be planned at the beginning of the

development process.

• When does an advisor exit the

scene? The answer, of course,

depends on the assistance being provided. Sometimes the assistance is

very short term. Issue-specific help

can often be completed in a relatively short period of time. General

development assistance may continue

throughout the project, even into

operation. 

• When does the co-op development effort end? USDA Rural

Development policy is that it makes

little sense to help form a co-op, and

then abandon it. Business development issues that arise after a co-op

launch are, to some extent, predictable. If the expertise exists to

assist the co-op further with these

issues, it should be offered. For

example: management turnover

often occurs in the first 12-18

months of business operation; the

board will face the need for a financial audit within a year of start-up;

board turnover will likely make a

board training program advisable

soon after the first annual meeting.

All of these challenges can be surmounted with the help of an advisor

who has experienced them in other

business start-ups. 

Summary

Effective technical assistance in the

development of a new cooperative

requires:

1. Understanding the cooperative

form of business;

2. Understanding development

processes and procedures;

3. Understanding business operations;

4. Knowledge of the industry in which

the cooperative will operate; 

5. Understanding one’s capabilities

and limitations. 

An outside agent must have the

knowledge, skills, experience and confidence to provide valuable guidance.

Arrogance to think that he or she

knows everything needed to complete

the co-op business formation will be

the downfall of an agent.

■

The inside scoop on outside help continued from page 28
Rural Cooperatives / July/August 2005 39

By Peter J.Thomas, Administrator

Business and Cooperative Programs

USDA Rural Development

ith record-high energy

prices this summer, it’s

no wonder that interest

in USDA’s Renewable

Energy and Energy

Efficiency grants and loan program is

soaring. Under this program, USDA

Rural Development has been allocated

$22.8 million to help farmers, ranchers

and small rural businesses promote

innovative renewable energy development and energy efficiency projects. 

Enhancing our energy diversity and

efficiency is a key goal of the Bush

Administration, and will provide an

opportunity to strengthen both our

national security and the rural economy. USDA Rural Development is playing a major role in helping to reach

this goal by funding a wide range of

technologies allowed under this program. They include: bioenergy and

biomass (including anaerobic

digesters), geothermal, hydrogen, solar

and wind energy, as well as energy efficiency improvements.

Agriculture Secretary Mike Johanns

calls renewable energy “an exciting

growth frontier for American agriculture” as the nation strives forward in

implementing an innovative energy

policy, and I heartily agree. 

The program, now in its third year,

was created by Section 9006 of the

2002 Farm Bill. About $11.5 million,

half the funds available, will soon be

awarded as competitive grants. By the

time the grant application

deadline ended earlier this

summer, we had received over 360

applications requesting more than $60

million – about double the number of

requests received the previous year. 

These grant requests are being carefully evaluated by teams of experts

from the Department of Energy and

our own Rural Development State

Offices who will eventually select the

most promising projects. 

Renewable energy grant applications may be made for a minimum of

$2,500 and a maximum of $500,000.

Energy efficiency grant applications

may range from $2,500 to $250,000.

The grant request may not exceed 25

percent of the eligible project cost. 

If your grant request isn’t funded

this year, or if you are now contemplating a new project, keep in mind

that applications for 2006 funds will be

accepted beginning October 1. 

The process is highly competitive,

so the more time you spend developing

a solid project plan that shows a strong

likelihood of success and which will

benefit the rural economy in your area,

the better your chances of funding.

The second $11.5 million available

in FY 2005 for this program has been

reserved by USDA to support guaranteed loans until August 31, 2005.

These funds can generate about $200

million in loan guarantees. As with

USDA Rural Development’s other

guaranteed loan programs, project

developers will work with a local

lender, who in turn can apply to

USDA Rural Development for a loan

guarantee. Any of the second $11.5

million not obligated to support loan

guarantees will be awarded as grants. 

Loans may be for up to 50 percent of the project’s cost, with a maximum of $10 million per project.

Deadline for the agency to obligate

funds for a loan guarantee is Aug. 31,

2005. Rural Development can accept

FY 2006 applications beginning Oct. 1,

2005 for both loan guarantees and

grants. However, FY 2006 budgets and

funding are not yet available. 

For more information on the

renewable energy and energy efficiency program, please visit our Web site:

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

mbill/index.html. Or, you can be connected to your USDA Rural

Development state office by calling

(202) 720-4323 or via links from our

Internet home page: www.rurdev.gov. 

To date, the Bush administration

has invested nearly $45 million in 32

states through this program. 

It is very encouraging to see how

innovative our nation’s farmers, ranchers and small business owners are in

adapting new technology in so many

ways to meet the nation’s energy

needs. The old saying, “where there’s

a will, there’s a way” certainly seems to

hold true on the new frontier of agrienergy. Working with this program for

the past two years has strengthened my

belief that it’s not a matter of if, but a

matter of when and how our nation will

become energy self-sufficient once

again. ■

Renewable energy:

the new frontier

INSIDE RURAL DEVELOPMENT

W

Ethanol production is booming in the United States. 
40 July/August 2005 / Rural Cooperatives

United States

Department of Agriculture

Washington, DC 20250

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