Rural

COOPERA COOPERATIVES

Hard choices:

Hard white wheats

may offer niche

markets for co-ops

Hard choices:

Hard white wheats

may offer niche

markets for co-ops

USDA / Rural Development March/April 2003
2 March/April 2003 / Rural Cooperatives

Too many people drift through life,

doing jobs they stumble into that pay

the bills and keep a roof over their

heads. Those who believe in their

product or service to the extent that

they execute their duties with absolute

sense of mission are the exception to

the rule. Randall Torgerson was one of

those exceptions. He woke up every

day anxious to get to work, roll up his

sleeves and fight for American farmers

and their cooperatives. 

You could say that Torgerson—who

retired in January after nearly three

decades at USDA, most of it spent leading the Cooperative Services program—

was born for the job. Randy’s baptism

into cooperatives came as a youth, during

the mid-1940s when dairy farmers in the

Upper Midwest were struggling. He

accompanied his father, Wisconsin county extension agent Truman Torgerson,

on trips to producer organization meetings that culminated in the formation of

the Lake to Lake dairy cooperative. Truman led that co-op for 35 years, until it

merged with Land ‘O Lakes. The insight

Randy gained into the thinking and

needs of farmers during his formative

years left an indelible imprint on him and

would serve him well in his chosen

career. It never allowed him to forget

who he was working for and what was at

stake in the fight to maintain a farmerownership role in U.S. agriculture

In his remarks saluting Randy at a

retirement function at USDA headquarters, Rural Development Under

Secretary Thomas Dorr referred to

Torgerson as “the dean of cooperative

culture” and “a cooperative purist.”

Few who knew Randy would argue

either point. He not only lived by the

co-op book, he helped write it. Much

of the modern cooperative system in

the United States has been influenced

by his ideas. He has truly been the

keeper of the co-op faith. 

Also during that retirement ceremony, Farm Credit Administration Board

Chairman and CEO Mike Reyna presented Torgerson with a resolution that

saluted him for having “never wavered

from the notion that farmers should

determine their own destiny,” and for

“working diligently and tirelessly to promote cooperative research and education

programs to help farmers maintain control of their cooperative organizations.”

Randy believes that cooperatives

must follow the core principles upon

which they were founded: that they be

owned and controlled by members and

operated for the benefit of their members. Too much deviation from co-op

principles, he maintains, could spell the

doom of cooperatives more assuredly

than any amount of competition. 

When Agriculture Secretary Earl

Butz tapped Randy in 1974 to head

what was then called the Farmer

Cooperative Service, there were

7,645 farmer-owned co-ops in the

United States with combined sales of

$41 billion. The trend toward ever

fewer, larger farms has seen major

changes in the nation’s agricultural

landscape. Today, there are 3,200

farmer co-ops, but their annual sales

have soared to more than $100 billion. As co-ops have become larger

and more complex, so too have the

challenges facing them. Never was

there a time when the need was

greater for the services provided by

USDA’s congressionally mandated

program of cooperative assistance. 

The last several years have been

among the most trying in history for

farmer cooperatives. With farm commodity prices still depressed and the

general economy struggling in low

gear, the immediate future will hold no

lack of challenges for farmers or their

co-ops. Torgerson says it is his greatest

hope that as co-ops battle to hold and

expand their markets in the years

ahead, they will not neglect the following five critically important areas: 

■ The need for effective, on-going

cooperative education programs to

ensure that members understand their

cooperatives and why they are needed.

They must also support leadership

training and recruitment efforts to

attract the type of skilled, knowledgeable leaders necessary to compete and

win in an ever-more competitive business environment. 

■ Co-ops must continue to operate

on a true cooperative basis and be

wary of moves that see them slowly

evolve into non-cooperative business

structures. 

■ The need to maintain a strong

member equity ownership base to

ensure members are committed to the

co-op and truly own it. 

■ Practice cooperation among

cooperatives and with other farmer

organizations and commodity groups.

United, their impact will be much

greater. 

■ Maintain close contact with European and other foreign cooperatives—

we still have much to learn from each

other through the exchange of ideas. 

If co-ops take these issues to heart,

it will be the ultimate legacy of Torgerson’s three decades at USDA. 

Dan Campbell, Editor 

COMMENTARY

The keeper of the co-op faith
Rural Cooperatives / March/April 2003 3

Rural COOPERATIVES (1088-8845) is published

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provider and employer.

Ann Veneman, Secretary of Agriculture

Thomas C. Dorr, Under Secretary, USDA Rural

Development

John Rosso, Administrator, Rural BusinessCooperative Service

James Haskell, Acting Deputy Administrator,

USDA Rural Business-Cooperative Service

Dan Campbell, Editor

Vision Integrated Marketing/KOTA, Design

Have a cooperative-related question?

Call (202) 720-6483, or

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United States Department of Agriculture

Rural COOPERA .

COOPERATIVES

March/April 2003 Volume 70 Number 2

On the Cover:

Production of hard white wheat is increasing rapidly in many

states, which may open up new niche marketing opportunities 

for grain cooperatives. Story on page 4. 

Photo courtesy Kansas State University

FEATURES

4 Hard choices

Hard white wheat varieties offer co-ops opportunities and challenges

By Michael Boland and David Barton

8 Turning problems into profits

Alpaca co-op survives early dissension to build domestic fiber &

products market

By Bruce J. Reynolds

12 Bargaining is big for small business

Resurgence seen in bargaining co-ops

By Bruce J. Reynolds

15 The “closure” dilemma

Conducting business in a way that helps keep both members and

their co-op in business can be a challenge

By Thomas W. Gray

18 Network difficulties

Tales of two Iowa pork-producer networks show that bottom-up

approach works best

By Randy Ziegenhorn

20 Striking oil

South Dakota Soybean Processors finds new ways to add value to crop

By Michael Boland and David Barton

24 A shared harvest

Machinery co-ops could help small, Upper Midwest dairy farms

By Catherine Ford and Robert Cropp

DEPARTMENTS

2 COMMENTARY

11 VALUE-ADDED CORNER

22 MANAGEMENT TIP

29 NEWSLINE
4 March/April 2003 / Rural Cooperatives

Hard choices 

Hard white wheat varieties offer co-ops opportunities and challenges

By Michael Boland and 

David Barton

Editor’s note: Boland is an associate professor of agricultural economics and associate director of the Arthur Capper Cooperative

Center at Kansas State University. Barton is professor of agricultural economics and director of the Arthur Capper Cooperative

Center. A longer version of this report with references is available

by contacting Mike Boland (785) 532-4449;

mboland@agecon.ksu.edu)

oordination of supply channels is an important

component of a successful competitive strategy

by food and agribusiness firms. One current

policy issue is the role of U.S. land-grant university Agricultural Experiment Stations in

wheat supply channels. The term “agricultural experiment

stations” is used throughout this article for historical reasons,

but it is important to recognize that the Cooperative Extension Service has also made important contributions in

research and education. In reality, land-grant universities typically use foundations to license intellectual property rights. 

Scientists and economists at public institutions have long

made important contributions to agricultural supply channels. For example, measurement of quality attributes in crops

and animals, coupled with value-based marketing programs,

have been the focus of much research and education. Likewise, plant and animal breeding programs at public institutions have been instrumental in improving productivity and

quality traits in agricultural commodities. University specialists in states such as Minnesota and Wisconsin were also very

instrumental in the formation of cooperatives at the beginning of the 20th century.

Public breeding programs historically have developed

the majority of wheat varieties. Hard white wheat (HWW)

varieties are new to much of the United States. Thus, 

alternative release procedures and the potential effect on

wheat-supply channels have been considered by experiment

stations. Recently, the University of Idaho and Montana

State University provided restricted release of varieties to a

producer-owned cooperative and several private firms.

Kansas followed a similar process over a decade ago by

licensing two varieties

to the American White

Wheat Producers 

Association (AWWPA),

which received ValueAdded Development

Grants (VADG) from

USDA in 2001 and

C

One of the challenges of dealing

with hard white

wheat is the need

to keep it segregated from red wheat.

If mixed, the price

may be severely

discounted. Photos

courtesy Kansas State

University 
Rural Cooperatives / March/April 2003 5

2002 (visit www.awwpa.com for more on this co-op).

The objective of this report is to provide an overview

of release procedures for HWW varieties in various

states. 

Publicly funded breeding programs account for the

majority of wheat varieties grown in the United States.

Because hybrid corn varieties cannot self-pollinate,

these varieties have been primarily developed by private firms. Thus, seed companies have economic

incentives to conduct research on new hybrid varieties

because producers must purchase hybrid seed each

year. However, there is little hybrid wheat planted at

the present time. Rather, producers plant public varieties and have the option of holding back seed (called

farmer-saved seed), which is then conditioned and

planted the following season. Or they can buy certified

seed each year. 

Recent white wheat variety releases

The introduction of HWW presents several challenges for wheat supply channels. First, HWW must be

kept separate from red wheat to avoid being severely

discounted. Second, because HWW varieties are developed for specific end uses, such as noodles or crackers,

the wheat must be marketed through an identity-preserved supply channel that allows end-users to purchase

wheat from suppliers. Finally, due to a small supply,

increased marketing investments in identity-preserved

supply channels are needed to serve end-users.

These reasons have led experiment stations to consider alternatives to a public release of HWW varieties.

A traditional release process involves experiment stations turning wheat seed over to crop improvement or seed

associations which, in turn, increase seed production so that

all producers may have an opportunity to purchase the variety. 

The motivations for considering alternative release procedures include: 1) protecting research investment of taxpayers,

wheat producers and crop improvement associations; 2) maximizing the supply of certified seed while assuring varietal

integrity; 3) developing markets with maximum value for

HWW to match production growth; 4) providing an orderly

transition from predominately red to predominately HWW;

and 5) maximizing the number of grower participants. 

HWW production in Colorado and Kansas

HWW acres in Colorado have increased from 7,000 acres

in 1996 to more than 25,000 acres in 2002. AgriPro, a seedbreeding company, contracted for its HWW varieties

(Solomon and Platte) to be grown by Colorado producers for

a leading miller (Con Agra). The premiums paid to producers averaged 15 cents to 35 cents per bushel during this period. The majority of the premium is paid for end-use properties, such as protein and other characteristics. During the late

1990s, Goertzen Seed Research (owned by Cargill) contracted with growers to produce a HWW variety, Snow White,

Pro Mar Select of Idaho, a producerowned cooperative, saw its hard white

wheat acreage expand from 8,000

acres in 1997 to 60,000 acres in 2000.

“Because (variety) 377s is unique, with a potentially higher

demand than commodity wheat, the university (Idaho) decided

against releasing it as a public variety. Rather, they wanted to

license it to an identity-preserved program....the best way to

accomplish this was through a farmer cooperative.”

Successful Farming
6 March/April 2003 / Rural Cooperatives

for use in Cargill’s mills. They were to be paid a 5- to 10-cent

per bushel premium.

Kansas Agricultural Experiment Station (KAES), in conjunction with AgriPro, licensed HWW varieties to American White Wheat Producers Association (AWWPA), a producer-owned cooperative, in 1988. The varieties included

AgriPro’s Rio-Blanco and KAES’ KS84HW196 and Arlin.

The decision to release these varieties to a producer-owned

cooperative was due to concerns that a general release could

disrupt wheat supply channels by mixing white with red

wheat (there was no HWW class until 1990). Price premiums were as high as 15 cents per bushel in the mid-1990s,

with 20,000 acres in production. 

In 1998, KAES announced plans to release two HWW

varieties (Betty and Heyne) and another eight to 10 varieties over the next three to five years. Alternative release

procedures, which potentially could involve a restricted

release, were analyzed. AWWPA, Farmland Industries,

Cargill and a new producer cooperative composed of

Kansas Crop Improvement Association members (called

AGvantage IP) submitted proposals for the HWW varieties. After a great deal of discussion, KAES decided to

release the HWWs following the general release procedures. Despite this decision, producer-members of AGvantage IP who grew Betty or Heyne ended up contracting

with Farmland Industries for a 10-cent per bushel premium.

Now General Mills and Cargill have HWW programs in

Kansas with 100,000 harvested acres in 2002, or approximately 3.3 million bushels. Estimated plantings in Kansas

for 2003 are 325,000 acres, which would yield about 11 million bushels. 

HWW production in Idaho and Montana

Idaho Agricultural Experiment Station (IAES) and the

USDA Agricultural Research Service used a restricted release

to license a HWW variety—Idaho 377s—to Pro-Mar Select

of Idaho Inc. in 1996. The license fee is 2 cents per bushel of

seed for the first 2.5 million bushels produced, 1.5 cents per

bushel for the next 2.5 million bushels and 1 cent per bushel

for anything over 5 million bushels. Idaho 377s was developed for export noodle markets, but it is now used in domestic and export markets. 

Pro-Mar Select of Idaho (also the recipient of a USDA

Value Added Development Grant) is a producer-owned

cooperative with 130 wheat-grower members. The cooperative has had mixed success, but has increased production

from 8,000 acres in 1997 to 60,000 acres in 2000. Pro-Mar

Select sub-licensed Idaho 377s to General Mills in Montana. More than 100,000 acres were contracted in Montana

during 1999, with premiums averaging 5 cents to 10 cents

per bushel. However, the cooperative has had trouble selling wheat overseas the past several years. It recently sold

much of its excess wheat (about 30,000 metric tons) to a

merchandiser who sold it to several firms, including General Mills. IAES recently released several other varieties,

including Gary and Ivory.

The Montana Agricultural Experiment Station (MAES)

has also used a restricted release for HWW varieties.

General Mills has exclusive rights to Nuwest, which was

developed for noodles and breads. About 40,000 acres per

year are planted to Nuwest. Another HWW developed by

MAES is NuSky. Wheat Montana, a private milling and

baking firm, also contracted a HWW variety called Golden 86. It is currently estimated that 100,000 acres were

harvested in Montana in 2002. 

Success factors 

Clearly, experiment stations are guided by well-meaning

intentions in analyzing alternative release procedures for

HWW. It is too early to tell whether these intentions will

be successful. 

Several factors are needed to ensure the success of a

“Producers formed a closed cooperative

(AGvantage IP) to market Kansas State University

hard white wheats.”

Kansas Farmer 

Agricultural experiment stations and Cooperative

Extension Service crop trials have helped produce promising varieties of hard white wheat, some of which can earn

growers premiums of 15 cents per bushel.
Rural Cooperatives / March/April 2003 7

HWW variety that is released to an identity-preserved 

supply channel: 

■ First, producers cannot be allowed to keep any of the

wheat for seed. Otherwise the exclusive licensing will not work. 

■ Second, a clear end-user must be identified. Due in

part to lack of marketing expertise, AWWPA and Pro-Mar

Select have had difficulty linking large volumes of wheat

with end-users. 

■ Third, the capability must exist to segregate the wheat

from other varieties during storage, handling and transportation to the final end-user. 

■ Fourth, economic incentives are

needed for all participants across the

supply channel (producers, merchandisers and end-users). The positive

reaction and competition for exclusive

rights to the varieties from millers and

other end-users suggest that these economic incentives exist for HWW. It is

important to note that many of these

economic incentives are related to various milling and baking attributes, not

just bran color. 

■ Finally, any restricted release

must have clear and positive net

returns to taxpayer and producer investments in the breeding

program. These returns may be royalties through licensing

arrangements that are used to reinvest in research and development of new varieties or through maximum participation

of producers in the system (i.e., opportunities to invest in a

cooperative or unlimited access to the seed varieties). One

criticism of HWW restricted release procedures is the fear

that seed producers will charge premium prices for certified

seed. USDA’s Economic Research Service reported that certified wheat seed was priced at an average of $3.51 per bushel

greater than farmer-saved seed. In Kansas, certified HWW

seed has been priced even higher. 

In the short run there appear to be economic incentives

for producer-owned organizations to grow and market

HWW. These economic incentives are likely to come from

increased milling extraction rates, (i.e., higher flour yields if

U.S. millers grind close to the bran), protein content and

other quality factors. This has been the case for local grainmarketing cooperatives that have partnered with millers to

produce and market HWW. Clearly, the role of the local

cooperative has been found to be important in the adoption

of HWW. In the long run, there may be emerging export or

niche domestic markets to pursue, especially if segregation

costs are reduced as producers and grain-merchandising

firms learn to manage two classes of wheat. Furthermore,

given significant investment by firms and experiment stations, there will be a greater HWW supply. However, HWW

acreage has not expanded as quickly as some thought. The

2002 Farm Bill contains provisions for a HWW incentive

payment to encourage its production, which is one reason

2003 estimated acreage on HWW is

about 700,000 acres, compared to

325,000 acres in 2002. 

The role of the Experiment Station

is to provide research and education.

Disruption of hard red wheat supply

channels by haphazardly releasing

HWW varieties would not result in the

greatest return to taxpayer and producer wheat checkoff fund investments. Do

public universities have a role in modifying agricultural supply channels?

Clearly, for the introduction of HWW,

experiment stations require input from

producers, agribusiness firms and others in the wheat supply

channel. The role of the Experiment Station is to provide

research and education. Disruption of hard red wheat supply

channels by haphazardly releasing HWW varieties would not

result in the greatest return to taxpayer and producer wheat

checkoff fund investments. 

If handled correctly, a restricted release is one option

that may provide increased returns to taxpayer and producer checkoff funds until enough supply is available. Given

differences in the structure of wheat supply channels in

these states, it is not surprising that alternative release procedures are considered for use by experiment stations. ■

Author’s Note: This research was supported by a cooperative

agreement with USDA Rural Business-Cooperative Service. We

gratefully acknowledge the help and assistance of Marc Warman.

Interviews with breeders, merchandisers, Agricultural Experiment

Station staff, seed producers, wheat producers and trade association

staff were used in preparing this report. 

“When it comes to hard

white wheats (produced at

Montana State University),

exclusive licensing is necessary to give companies an

incentive for handling the new

class of wheat.”

AGWEEK 

Long in the planning stage, construction of a $5.2 million sugar storage and distribution center is underway at the Port of

Greater Baton Rouge, La. The facility is owned by Louisiana Sugar Cane Products Inc., a cooperative at Baldwin, La., that

serves 11 mills. The new center will be financed with $5.2 million in state funds, $3.2 million from the cooperative and $500,000

from the port. ■

Co-op sugar center to open in Louisiana
By Bruce J. Reynolds,

USDA Rural Development Economist

bruce.reynolds@usda.gov

aising alpacas is a relatively new industry in

North America, the animals having been first

imported into the United States in 1984 from

South America. But the new industry is catching on, with the help of a national cooperative

that is developing a domestic market for the luxurious fiber

of these close relatives of the llama. 

The co-op is starting to prosper, but it had to survive a

near-fatal dispute in its second year which split the board

and the membership. This internal debate centered on

whether to concentrate on marketing members’ alpaca fiber

as a raw product or manufacturing it into value-added apparel. Ultimately, the breach was healed and the industry is

moving forward. 

Planting the seeds for growth

The reproduction of alpacas, in contrast to exotic livestock

such as emus, is not rapid. An alpaca typically has a gestation

period of 335 days for one offspring. Yet, by the mid-1990s,

the U.S. alpaca herd had grown to about 8,000. Today there

are about 37,000 alpacas in the United States, compared to

about 3 million in Peru.

Ohio is home to the largest number of alpacas in the nation,

followed by Washington and Oregon. There are more than

2,700 registered owners, a twofold increase since the mid1990s. We know profit is the driver of any industry, but how

are profits made in this case? 

The alpaca industry involves two core businesses. The

first is animal breeding, which is the primary driver for a new

domestic industry of this kind. The second is a textile fibers

business, whose potential growth is dependent upon market

development activities. Establishing a successful textile products business, based on a type of fiber that has not been widely used in the North American apparel market, involves substantial long-term planning and coordinated efforts. 

The North American alpaca industry has enormous growth

potential, to the extent that interdependencies between its two

core businesses are fully recognized and used. Alpaca breeding

and marketing generates a source of revenue for reinvestment

in the fiber segment of the industry. In turn, growth and

development of the alpaca textile products’ market in North

America is having a positive impact on the market for breeding stock. Furthermore, improved marketing methods for

alpaca consumer apparel and a steadily increasing domestic

supply of alpaca fiber are beginning to open the way for profits from the textile component of the industry. 

A cooperative, the Alpaca Fiber Cooperative of North

America (AFCNA), is leading this development. Before it

began operating in 1998, the alpaca fiber market was predominantly limited to relatively small and dispersed purchasing by artisan weavers. 

Launching the co-op 

Early-on, most alpaca owners did not feel any urgency to

develop the alpaca fiber and products market. During this early

phase, earnings were predominantly derived from selling

breeding stock. It didn’t seem to make good economic sense to

build a U.S. fiber market because of the difficulty of competing

with South American alpaca products. But some alpaca owners

questioned this assumption. They believed there were fiberproduct opportunities for their industry, and that the only way

they would be realized is with a major collective effort. 

USDA/RBS Cooperative Services conducted a survey of

potential members to gauge interest in a co-op and worked on

the initial stages of organization. Survey results showed a wide

8 March/April 2003 / Rural Cooperatives

Turning problems into profits

Alpaca co-op survives early dissension 

to build domestic fiber & products market

R

There are about 37,000 alpacas—a close relative of the llama—

in the United States today. Opposite: garments made from

alpaca fiber. Photos courtesy Alpaca Fiber Cooperative of North America. 
Rural Cooperatives / March/April 2003 9

range of perceptions regarding what a cooperative might do

and what would be involved. It was evident that this fledgling

industry would need leaders with exceptional communication

skills and creative thinking to make the venture succeed. And

that is what happened. Many talented individuals stepped up

to the task and volunteered much time and effort. 

Another important factor in getting AFCNA started was

the creation of an organization for handling alpaca breeding

and investor issues: the Alpaca Owners and Breeders Association (AOBA). It, too, had been established relatively quickly;

about five years after the first imports of breeding stock in

1984. AOBA provided a

forum for its geographically dispersed membership to discuss a

cooperative. 

Internet communication has, of course, contributed to the capability

of coordinating the

activities of large membership-based organizations and businesses.

AOBA also provided

some funding for promoting alpaca fiber. But

in the cooperative planning stage, it was evident

that a large majority of

AOBA members would

not join a co-op, and

there was uncertainty about how effectively the supporters

would be able to organize for business. 

If one person is to be singled out for moving the cooperative agenda forward, it is Julie Safley, who operates a familyowned alpaca ranch and retail store in Hillsboro, Oregon. She

edited a newsletter for alpaca breeders and owners that was

used, along with seminars at AOBA meetings, to get across

critically important concepts about the potential economic

value of the fiber, how alpaca textile products contribute to

demand for the breed and—last but not least—the basics of

organizing and operating a cooperative. 

Safley was part of a core group that in 1997, a year before

organizing the cooperative, pooled 4,850 pounds of alpaca

fiber for custom processing of yarn for craft knitting. Significant experience was gained in fiber care, sorting and packaging that contributed to the future success of the cooperative.

Initial fiber shipments

Given that AFCNA’s objectives included industry and

market development, it was organized as a traditional, openmembership cooperative. Membership required payment of a

$150 fee and signing an agreement to deliver a specific share

of the highest quality fiber from the alpaca clip. 

The co-op started with a membership of 325, representing

slightly more than a quarter of the AOBA membership in 1998.

Members shipped fiber from numerous locations throughout

the United States and Canada to a Texas animal fiber warehouse for baling and storage. The plan was to collect a large lot

of alpaca fiber for eventual shipment to a mill in Peru. 

The co-op received about 27,000 pounds of fiber, an

unqualified success but still a relatively small lot in terms of

shipping to a foreign textile mill. The board decided to hold

it in storage and added the 1999 receipts for a total volume of

52,000 pounds, readied for shipment to the mill. 

The marketing plan was to offer alpaca apparel products

through three channels: (1) the on-ranch retail stores that

many members operated; (2) e-commerce sales from the

cooperative Web site and (3) booking advertising space in a

mail-order catalogue. 

The initial operations were entirely member-financed.

Members did not receive advances on fiber and product orders

were paid by the members. With this support and an enormous

amount of volunteered time, the cooperative was launched. 

Split decision causes fallout

The market for fine animal fiber in 1999 experienced a

substantial run-up in price. International buyers came to

Texas looking to purchase kid mohair and cashmere. The

warehouse was holding an auction for its mohair inventory

when a few buyers noticed—to their surprise—the lot of

alpaca fiber. 

Although it wasn’t for sale, the warehouseman contacted

the AFCNA board about receiving some bid prices from these

buyers. There seemed no harm in that, and after all, who

wouldn’t be curious to know the value of what they produce? 

The entire lot was valued at an average price of $2.68 per

pound, which was very attractive in view of the fact that the

cash-starved cooperative could receive payment, as well as avoid

major outlays for the project in shipping to Peru, processing

costs and returning products to members or to the cooperative.

The board was split, five wanting to stay with the value-added

project and four wanting immediate sale of the raw fiber. 

The fallout over this disagreement was huge. The four in

favor of a sale resigned from the board, including the president of AFCNA. The entire Canadian membership and 

several U.S.-based members also quit the cooperative. 

The fallout continued into early 2000, when a group of

about 80 members started a petition to recall the board of

directors. The value-added direction was not helped by the

fact that turn-around time exceeded one year between the time

members’ fiber was delivered and products were returned. 

But once members began receiving value-added alpaca

products, things began to look up. The board persevered with

a direction that does more for market development of both

alpaca breeding and apparel products demand than would a

raw fiber selling operation.

Discovering opportunities

The dealings with Peruvian textile mill managers, while
10 March/April 2003 / Rural Cooperatives

slow, did lead to some useful ideas.

These managers had a ready supply of

stylish consumer apparel products they

wanted to sell to AFCNA. Though not

products made from the members’

fiber supply, this was the beginning of a

rewarding business relationship. More

consumer apparel products, made from

both Peruvian and U.S. alpaca fiber,

could be moved through the pipeline to

the members’ stores and the cooperative outlets. Lack of demand has not

been a problem. 

Having a full-time manager is a critical element for most cooperatives seeking to be well-positioned to discover

market opportunities. Securing a permanent manager had been a priority of

the board from the outset, but it was not

effectively realized until the 2001 operating year. 

Board President Sharon Winsauer

points out that you can only go for a 

limited time with volunteers. While

committed individuals step in to do their part, it’s hard for volunteers to deal with a deluge of second guessing and criticism

from those on the sidelines when making difficult decisions. A

manager can devote more undivided attention to the co-op.

This is critically important for tasks such as maintaining a

product warehouse and keeping track of inventory. 

The management search process proved fruitful because

one of the board members, Karen Dewhirst, had managerial

skills and a desire to develop this business. Karen resigned

from the board to become the general manager. She also

operates a farm store along with raising alpacas in Decatur,

Tenn. Her experience in the farm store side of the alpaca

business has proven useful, not only for understanding product marketing, but also in having insight for developing some

new programs for members. 

Turning problems into profits

AFCNA developed into a cooperative that combines a

purchasing function with marketing. The membership is

divided between those who operate retail stores and those

who do not. A traditional farmer cooperative does not usually engage in marketing member products while also purchasing the same kind of products from foreign sources to

support the marketing businesses of a particular group of its

members. But what would appear to be a potential problem

for a cooperative is viewed by this board and manager as a

business opportunity. 

For alpaca owners and breeders who might feel that a retail

store would offer them some additional earnings potential,

AFCNA has developed an innovative service, the alpaca 

products station (informally called the “store in-a-box”). The

cooperative offers this service to help

interested members establish farm stores.

In addition, Dewhirst explains that,

“Selling alpaca products from an alpaca

farm/ranch is an excellent tool for marketing alpacas because it answers the

question, “what do you do with alpacas?” 

AFCNA is pursuing many product

processing and marketing initiatives.

It’s effectively moving member herds’

different fiber qualities into their best

value uses and markets. Arrangements

have been made with domestic mills

for certain blended fiber products, such

as production of socks. A program for

marketing coarser fibers to rug and

carpet makers is also being developed. 

AFCNA’s purchasing service enables its

marketing channels and member stores

to offer a range of attractive apparel

products. These products can be

viewed and bought through its toll-free

phone number listed in their brochures

or at the cooperative’s Web site: 

www.AmericasAlpaca.com. This Web site provides information about AFCNA, breeding alpacas and textile products as

well as information to consumers interested in buying either

alpaca clothing or knitting yarns. 

5-year start-up not unusual 

The start-up of many cooperatives is often challenging,

and AFCNA’s history is no exception. Founding members are

advised to not develop high expectations at the start. However, if some signs of tangible results do not materialize after

about five years, the effort is likely to begin to unravel. 

By 2001, AFCNA began to break even and in 2002 had positive net income while eliminating carryover losses from 2000.

Its membership has more than doubled from its start to its fifth

year, having about 750 members in 2002. 

Getting to this point was not easy. Two years earlier it

looked like AFCNA was in decline. Part of this turnaround

can be attributed to the early growing pains that many cooperatives experience, but there were also a few key decisions

by the board that made a big difference. Staying with a business concept that maximizes the mutual benefits between the

two businesses of alpaca breeding and products marketing is

a major one. Out of this direction came new business concepts, such as developing the retail sales capabilities of members and helping them establish on-ranch stores. 

But good business concepts don’t get very far when there’s

no one person empowered and responsible for getting things

done. AFCNA did not start out with a manager, but realized

soon enough that the business would never grow without one.

By a combination of firmness in direction and flexibility in

finding business opportunities, AFCNA is moving ahead. ■

The Alpaca Fiber Cooperative of North

America has a Web site and ships garments direct to consumers worldwide. 
By Gail Thuner, 

Agricultural Economist, 

USDA Rural Development 

Editor’s Note: This article is the first in

an ongoing series of articles highlighting

cooperatives that have had success marketing value-added agricultural products as

the result of receiving a USDA ValueAdded Producer Grant, and/or are 

working with the new Agricultural Marketing Resource Center. This article will

introduce the grant program. The second

article, to appear in the May-June issue,

will introduce the Agricultural Marketing

Resource Center. Following articles will

profile cooperative success stories.

What is the ValueAdded Producer

Grant Program? 

A. The ValueAdded Producer

Grant Program, also known as the Value-Added Development Grant

(VADG) Program, first started as a

pilot program authorized by the Agricultural Risk Protection Act of 2000

(ARPA). The program was then

expanded by the Farm Security and

Rural Investment Act of 2002 (2002

Farm Bill). Currently, the program is

intended to assist independent agricultural producers and producer groups

with marketing value-added agricultural products. The grants are meant to be

used for planning activities such as feasibility studies and development of

business plans as well as for working

capital by start-up businesses.

What does “value-added agricultural product” mean? 

“Value-added agricultural product” is

defined by the 2002 Farm Bill as any

commodity or product that: (1) has

undergone a change in physical state, (2)

was produced in a manner that enhances

the value of the agricultural commodity

or product, (3) is physically segregated

in a manner that results in the enhancement of the value of the agricultural

commodity or product, and (4) is farm

or ranch-based renewable energy.

Examples of value-added products are

organic carrots, identity-preserved corn,

ethanol and processed lamb.

Who administers the VAPG 

Program? 

The program is administered

through the Cooperative Services Program of the Rural Business-Cooperative Service (RBS), an agency of USDA

Rural Development. 

What are the relevant pieces of

legislation and regulations that 

govern the VAPG Program? 

The Agricultural Risk Protection

Act of 2000 as amended by the Farm

Security and Rural Investment Act of

2002 is the authorizing legislation.

Currently, RBS is in the process of

drafting a proposed regulation for the

VAPG Program. The regulation is in

the clearance process and is expected to

be released mid-spring 2003. After a

comment period of 45-60 days, the

agency will publish the final regulation

and issue a Request for Proposals

(RFP). The RFP is expected to be

issued in the summer of 2003. In addition to the final regulation and the

RFP, the VAPG Program is governed

by 7 CFR 3015 and 7 CFR 3019.

Who is eligible for the grant? 

Grants may be awarded only to

independent agricultural producers,

agricultural producer groups, farmer

or rancher cooperatives, and majoritycontrolled producer based business

ventures. Independent agricultural

producers include individuals, associations of producers, and producerowned corporations which do not produce the agricultural product under

contract or joint ownership with any

other organization. An independent

producer can also be a steering committee composed of independent agricultural producers in the process of

organizing an association to operate a

value-added venture that is owned and

controlled by independent producers

supplying agricultural product to the

market. 

Agricultural producer groups are

trade associations and farm organizations representing independent producers. An agricultural producer group

must identify a specific group of independent producers when it applies for a

VAPG. Majority-controlled producer

based business ventures are ventures

where more than 50 percent of the

ownership and control is held by independent producers and/or partnerships, LLCs, LLPs, corporations or

cooperatives that are themselves 100

percent owned and controlled by independent producers.

What types of projects are 

eligible for the grant? 

Eligible applicants may use grant

funds for planning activities such as

conducting feasibility studies and developing business and marketing plans for

the marketing of a value-added agricultural product or for working capital for

a beginning operation. Agricultural

Rural Cooperatives / March/April 2003 11

USDA’s Value-Added Producer Grants invest

millions in innovative ag businesses

Q.

V ALUE-ADDED CORNER

continued on page 30
12 March/April 2003 / Rural Cooperatives

Bruce J. Reynolds, Economist

USDA Rural Development 

rganized bargaining is

traditionally a strategy

of labor unions and

agricultural bargaining

associations. But many

new applications of formal bargaining

have emerged during the past 20

years. The relatively recent applications range from bargaining over

healthcare costs to a myriad of purchasing needs by independent business retailers and distributors. The

latter are a broad-based category, generally called purchasing cooperatives.

Some non-agricultural purchasing

cooperatives date back to the early

20th century, but bargaining is a more

recent approach for several organized

groups of retailers or distributors. 

At least 250 purchasing cooperatives currently operate in the United

States, according to a survey by the

National Cooperative Bank (NCB).

The fall issue of NCB’s magazine,

Bank Notes, reports that purchasing

cooperatives have doubled in the past

10 years. The National Cooperative

Business Association (NCBA) estimates that about 50,000 small businesses are members of purchasing

cooperatives, with membership having

doubled in the past decade. 

Beginning in the late 19th century,

many farmer associations were called

“purchasing cooperatives,” but did not

involve formal bargaining. They

achieved discounts by buying large

volumes of farm supplies, and then

passed these savings on to members.

By the middle of the 20th century,

many of these cooperatives joined

large federations with sufficient size to

manufacture, rather than purchase,

many agricultural inputs. The term

“farm supply” had displaced “purchasing” for designating these cooperatives. But, in recent years, the purchasing activities of local farmer

cooperatives have had a resurgence. 

Agricultural bargaining is traditionally used in markets for farm products.

Most farm product cooperatives have

followed a strategy of vertical integration, or what is currently termed “value-added processing and marketing.”

But bargaining associations have an

important role in the marketing of

crops for many farmers. There are at

least 67 agricultural bargaining cooperatives operating in the United States,

as indicated by respondents to the

USDA Cooperative Services’ annual

survey for 2001. The number of farmers belonging to the 67 bargaining

associations is not consistently reported, but the median association had 124

farmer members. 

Bargaining by agricultural associations and by purchasing cooperatives

of retailers/distributors have the same

challenge in representing the “many”

in negotiations with the “few.” A

major difference is in positioning on

the supply chains in their respective

industries. Positioning in this context

means proximity to consumers (see

figure 1). Although agricultural and

non-agricultural cooperatives are 

usually not examined together, those

having a common strategy of collective bargaining provide a basis for

comparison and for learning about

consumer markets. 

Bargaining as a 

cooperative strategy

The traditional practice of purchasing cooperatives is to capture discounts by buying in large volumes

and providing cost savings with

wholesale distribution for their members’ retail businesses. This modus

operandi is frequently used by cooperatives whose members are in the grocery and hardware business. Many

recently formed purchasing cooperatives operate instead by negotiating a

standard contract for members who

then make their own individual

transactions according to the negotiated terms. Members have flexibility

to address contingencies not covered

by, or in conflict with, the contract

negotiated by their purchasing 

cooperatives. 

Agricultural bargaining associations

exhibit a fundamental distinction that

parallels the non-agricultural purchasing cooperatives. Some associations

negotiate a standard contract for farm

products which members adhere to

when making their own sales transactions with processors. Their procedure

is basically the same as that of the

recently established purchasing cooperatives, which operate as bargaining

agents. Other agricultural bargaining

associations negotiate a standard contract but also function as an exclusive

sales agent for members. However,

their sales agency operations do not

alter the fact that their primary economic role is bargaining. 

Where they are similar

There are many superficial differences between bargaining by nonBargaining is big for small business

Resurgence seen in bargaining cooperatives

O
Rural Cooperatives / March/April 2003 13

agricultural purchasing cooperatives

and agricultural associations, but 

fundamentally such organizations

represent the combining of otherwise

isolated individuals to countervail the

bargaining power of large corporate

entities. Farmers operate as independent producers in the sense of 

working for themselves and running

their own business. 

For farmers who operate with 

production contracts, bargaining

associations may offer potential to

improve their contract terms. Operating independence also applies to

the small business owners of nonagricultural purchasing cooperatives.

Many of them are independent in

all—or at least some—critical phases

of decision making, including those

who operate as franchisees. 

A distinctive element of strategy

for any kind of bargaining cooperative is building consensus, loyalty and

trust among members before engaging in negotiations. These considerations are not encountered to any

great extent by their counterparts in

the bargaining process. The aim of

both agricultural and non-agricultural bargaining cooperatives is to gain a

fair share of income along a supply

chain where total value is determined

in the final sales of goods and services

(figure1). 

Pricing objectives differ

Bargaining by purchasing cooperatives involves negotiations over product prices with manufacturers on

behalf of members. Their members

are either retailers of similar consumer products or distributors of specialty products to various kinds of

construction industries. Their objective is to reduce purchasing costs, in

contrast to the aims of agricultural

bargaining to achieve higher prices

for commodities. Purchasing cooperatives can make a similar argument to

the familiar refrain of agricultural

processing firms—that higher prices

will either shrink the market or allow

competitors to take customers away. 

No safety in numbers

Purchasing cooperatives and agricultural bargaining associations both

represent “the many” in relation to

“the few.” But purchasing cooperatives

have not sought special legislation to

protect their retailer/distributor members from boycotts by manufacturers.

Farmers who participate in collective

bargaining are sometimes vulnerable

to being selectively boycotted by agricultural processors or packers, a problem which is partly addressed by the

Agricultural Fair Practices Act of

1967. A weaker, and more general,

protection is contained in the Packers

and Stockyards Act of 1921. 

For several reasons, members of

purchasing cooperatives are unlikely

targets of manufacturer boycotts for

having participated in collective bargaining. First, they often have a customer base, and manufacturers would

Figure 1—Industry Supply Chains
be reluctant to take actions that disrupt

consumer access to their branded products. Furthermore, these members usually have fewer competitors in distribution and retailing in their relevant

markets, in comparison to the number

of farmers who compete with one

another in making sales to a processor

or packer. Agricultural processors often

have several alternative sources for

products, so—in this sense—there is no

safety in numbers for farmers. 

Finally, many product manufacturers and members of purchasing cooperatives both face, though in different

ways, market pressures from the bigbox retail chain stores. To these manufacturers, the members of purchasing

cooperatives are in certain respects

informal allies. 

Future applications of

bargaining in agriculture

Production and marketing systems

in agriculture have undergone enormous change in recent decades, 

transitioning from a system of local

market access for farmers to one of

contractually closed and streamlined

supply chains. In this new economy,

the need for the traditional type of

agricultural bargaining association

persists, possibly even having an

increased importance for farmers.

Many farmers are vulnerable to

accepting lower prices when they

individually negotiate without a bargaining association. But the future of

agricultural commodity bargaining

may depend in part on improved laws

for sanctioning and protecting farmers from being victimized by

restraints of trade.

Bargaining is potentially applicable

to improving the terms of production

contracts. Initiatives to establish bargaining by contract poultry growers

have proven difficult to implement,

but efforts are continuing. If production in other livestock industries

becomes predominantly a contracting

system for labor services, the benefits

of bargaining will become more relevant in these sectors as well. 

Recent developments in biotechnology are having new impacts on the

distribution of incomes in the food

and fiber supply chain. Farmers are

increasingly using patented GMO

inputs in livestock and row-crop

farming that are contractually linked

to application of other inputs. The

marketing of biotech inputs is in an

early phase of development, when

savings in per-unit costs of production are being gained by farmers who

adopt these technologies. To the

extent that new technologies require

farmers to specialize and to operate

under contractually specified methods

of farming, opportunities to negotiate

better contractual terms may arise

through organization of bargaining

cooperatives.

Many farmers are developing

direct access to consumers or restaurant owners, either through e-commerce, farmers markets in urban locations, or special promotional efforts.

By their involvement in direct marketing of specialty products, they are

operating in the same position on the

supply chain as the retailer/distributor members of purchasing cooperatives (figure 1). Organized bargaining

may become an applicable tool for

these farmers when negotiating for

services like shipping or storage or for

shelf space, whether in urban farmer

markets or within retail establishments. Agricultural bargaining can

work on the input and service side,

just as it traditionally has for negotiating farm product prices. 

Specialized knowledge

and motivation

The source of competitive advantage for small businesses and farmers is

their specialized knowledge of products

and their motivation as business owners to serve customers better than large

firms that separate owner from operator. But success in business is not solely

determined by meeting needs of certain customers. Large firms that have

been able to coordinate and reduce

costs throughout the supply chain

often become the industry leaders.

Small businesses and farmers can also

reduce supply-chain costs and offset

the disadvantages of decentralized

operations with a bargaining cooperative. The expertise of owner-operated

businesses can flourish when their

negotiating power for essential supplies

is on a more equal footing with the

much larger competitors. 

Farm product direct marketing is

not a workable, or available, method of

operation for most farmers. But the

attributes of the successful small business in delivering product knowledge

to consumers and the pride of ownership in building a business are achievable with cooperatives, whether they

provide value-added integration or

bargaining. 

The success of small business in the

application of bargaining through purchasing cooperatives serves as an example

of the benefit of a system that supports

operating independence. That benefit

applies to farming as well. As markets

and economic conditions change, farmers can pursue new strategies to increase

their profitability and maintain their

operating independence. ■

14 March/April 2003 / Rural Cooperatives

The expertise of

owner-operated 

businesses can 

flourish when their

negotiating power

for essential supplies

is on a more equal

footing with the

much larger 

competitors.
Thomas W. Gray, Phd.

USDA Rural Sociologist

ress coverage of member

reaction to recent closings of several local grain

elevators by South Dakota Wheat Growers

(SDWG) underscores one of many

dilemmas faced by cooperatives in

maintaining business for memberusers. Changes in farm production

toward fewer, larger farms can pressure

boards and management to consolidate

operations —particularly grain and

farm supply co-ops in the Midwest and

Plains states. Closures may improve

survivability of the larger cooperative

business, but may also compromise the

survivability of local farmers. 

Negative reactions to these closures

may be quite intense, and loss of

farmer loyalty and survival may further strain the co-op. How to conduct

a business for members in a way that

helps keep both members and the

cooperative in business is becoming a

growing challenge in many parts of

the nation.

Closures stir resentment 

SDWG is a multi-faceted agricultural cooperative headquartered in

Aberdeen, S.D. The cooperative’s

largest gross-volume activity is grain

marketing, though it also operates a

state-of-the-art fertilizer facility, one of

the largest inland fertilizer storage and

distribution centers in the Upper Midwest. SDWG cites this facility as an

example of “taking yet another step in

providing faster, more efficient services

for its customers.” The cooperative

also offers a full line of agronomy and

petroleum products and services, and—

through joint ventures with other

cooperatives—produces and distributes

feed stuffs and provides bulk heating

and diesel fuels.

The cooperative recently closed several smaller elevators, including those

P

The “closure” dilemma 

Conducting business in a way that helps keep both 

members and their co-op in business can be a challenge 

Rural Cooperatives / March/April 2003 15
in Stratford and Hecla, S.D., and in

Ellendale, N.D. SDWG officials attributed these closings to faltering business

at these locations and lack of rail service. However, some local users of the

grain services there resent the closures

and question whether the shutdowns

were really necessary.

“I wouldn’t haul a kernel of grain to

them...that’s the feeling of a lot of people,” one farmer commented, as quoted

in The Chamberlain Register. 

Members in these areas report their

transportation costs have risen as a

result of the closures. They acknowledge that prices were lower at the

smaller elevators, but hauling costs and

time were also less. With the closings,

what was once a three-mile trip to an

elevator has, in some instances, become

a 23-mile trip. Some users of the closed

facilities insist these changes have been

driven predominantly for profit reasons, without regard for the welfare of

local members. 

“If you buy the competition out,

you can set the price, which means

more profit for South Dakota Wheat

Growers. They don’t care about farmers,” one member was quoted in the

Chamberlain Register. This backlash of

member resentment can, in turn,

compromise the larger business—

especially for multi-branch local

cooperatives which might not be able

to afford a large number of defections

due to an unpopular action. 

Survey gauges problem areas 

A recent USDA Rural Development

study of cooperatives in the Northern

Plains asked grain cooperative officials

to identify their most troublesome

problems of the past few years, and

what major problems they expect to

face in the near future. Five problem

areas were identified most often: low

commodity prices, the state of the general agricultural economy, operational

difficulties, increasing production costs

and competition. These problems have

direct effects on the survival of both

farmers and their cooperatives. 

Low grain prices and increasing

costs—particularly the costs of fertilizer and fuels—have pushed cooperatives

and members alike into a cost/price

squeeze on margins and profitability.

Many farmers, caught between low

prices for grain and high prices for fertilizers and fuels, have not been able to

continue to operate and had to sell

their farms. Others have increased the

scale of operation by purchasing neighboring farms, spreading costs over larger volume. Larger scale operations, in

turn, have allowed some farmers to

bypass local elevators and cut better

deals by going directly to terminals. 

In the USDA study, cooperative

officials in the Northern Plains region

identified major problems, such as:

■ farmers doing direct business and

bypassing the local co-op; 

■ competition from local terminals; 

■ maintaining a viable customer base; 

■ fewer farmers; 

■ the need to find ways to compete

with Internet-based businesses.

These changes in the agricultural

economy tend to drain away grain volume from local elevators and intensify

competition for what has become a

smaller number of producers with larger volume and more options. 

Some cooperatives close under such

pressures. Others have made various

operational adjustments, improving

financing and efficiencies, better managing debt and diversifying. SDWG

advertises their fertilizer plant as a continued step in improving efficiencies.

As mentioned, they have also diversified into other agronomy products, services and fuels. It is not uncommon, as

well, for cooperatives to consolidate,

close smaller branches, but also to

merge with other cooperatives and

expand locations. 

Fundamental dilemma

In an economy with a shrinking

farmer base, increased competition, pervasively low commodity prices and rising

costs, a fundamental dilemma arises: how

does a co-op maintain business services

to farmers while acting to keep farmers in

business via organized cooperation? In

other words, how do they “keep farmers

coming through the door?” 

The closure of local facilities may be

understood as a necessary measure to

improve overall efficiencies of the

cooperative business. However, closure

of local facilities can, in turn, force yet

more producers out of business or push

their business to competitors.

Closing local facilities always tends

to be controversial and can be critical to

the fate of producers, and cooperative

business. Cornell Professors Bruce

Anderson and Brian Hennehan maintain that not closing financially troubled

local feed mills (due to member

demands) contributed to a recent Chapter 11 Bankruptcy filing by Agway Inc.

These are part of the inherent tensions

cooperatives face. How to conduct a

business for members that helps keep

both members and the cooperative in

business is not always clear. 

Brett Fairbairn of the University of

Saskatchewan, suggests that agriculture cooperatives have chosen the

same survival strategies over the past

50 years: “expanding, merging, 

rationalizing.” This process tends to

over-emphasize short-term, economic

survival and a “crisis management”

mentality. Following these strategies

has resulted in many cooperatives

emerging as large, complex organizations. This has occurred in an era of

increasing mistrust of large, bureaucratic businesses. When farmers lose

services, they may come to believe

that their economic fate is independent of, or means little to, the 

cooperative organization. Loyalty,

commitment and support can decline,

and they may view their cooperatives

as “not caring about farmers.” 

Fairbairn argues that there has been

a loss of creativity and dynamism in

what has become “either/or” decision

making, with boards feeling they have

to sacrifice either the interest of their

co-op or their members when deciding

whether to reduce services, pursue

mergers or close facilities. He suggests

agricultural cooperatives may need to

seek new paths that are beneficial for

both cooperative business and farmers

as a collective group. 

16 March/April 2003 / Rural Cooperatives

continued on page 31
Editor’s Note: the following article was provided by South Dakota Wheat Growers to

explain why—like many other cooperatives—it

has closed some elevators. 

A modern combine can harvest 20,000 bushels of

corn a day. About 25 years ago, a typical combine could

harvest just 3,000 bushels a day. Most of today’s farmers now own their own semi trucks and have the ability

to haul large volumes of grain to whatever market provides them the best return, both for

price and service. Consequently, for

the majority of the members of

South Dakota Wheat Growers

(SDWG), the most important aspect

of service is the ability to get trucks

dumped quickly and efficiently, then

back to the field to maximize their

productivity. 

Most farmers’ production is

shipped to markets outside their production area, so access to rail service

is imperative for efficient grain-marketing. In response to producers’

demand for service, SDWG has

invested heavily in substantial

improvements in facilities that are

strategically located on rail lines. These shuttle-train loading facilities provide producers and grain shippers with

better, more flexible pricing options in grain marketing. 

SDWG’s service model to its membership is indicative of the changing landscape of U.S. agriculture. As

times change, tough business decisions must be

made to provide the earnings needed for expansion of

facilities. These facilities must provide the service

that creates the most value for the membership, both

in terms of market price and service. Providing faster,

more efficient service comes with trade-offs, which

often means closing inefficient, out-dated facilities,

many of which were built more than 75 years ago.

After all, virtually, no full-time farmer today is using a

75-year old tractor.

SDWG has made business decisions and sold six

facilities in the past four years. All six have the same

characteristics: they were small and out-dated, and all

but one were not on rail lines. The out-dated facilities

were not keeping up with the service demands of the

membership. In all cases, prior to a facility closing,

SDWG improved service at another of its elevators within 25 miles of the closed facilities. Construction or

upgrading has occurred at these facilities, which are

located on rail lines and can handle larger trucks more

efficiently and faster than the closed facilities. For

example, just one SDWG shuttle-loading facility handles

as much grain in a day as some of the out-dated elevators handled in an entire season. 

When decisions are made to close a facility, usually

the majority of producers in the area are unaffected by

the decision and have little or no comment on the issues.

Their service needs are already being met with improved

service at another location. The next

most common response is from producers who do business with the cooperative and understand the reason for

the decision, but regret the loss of a

facility in their community. The third

group is very passionate and fights to

keep one of the last remaining businesses in their community. 

For this third group, convenience

and social interaction are very important. They may have already seen the

community’s implement dealer, bank,

hardware store, school and lumber

yard leave town. The emotional equity

they have invested in their community

and cooperative means that a closure

causes them anguish. Having been a part of a community for many years, it is also a tough decision for the

cooperative to move its service to another location. But

sometimes tough decisions are necessary.

SDWG uses its monthly member newsletter to discuss changes within the industry and its response to

those changes. Many months before facilities were

closed, directors of the cooperative, who are farmers

and members, discussed in several newsletters the

need to close facilities as service capabilities are

enhanced at other locations. In the case of closings that

occurred during the summer of 2002, letters were mailed

to each producer who had done business at the affected facility in advance of the closure announcement. This

was done to give them enough lead time to plan for the

next harvest season. 

SDWG will continue to focus on service to its membership to meet the demands of today’s changing agricultural industry. This will undoubtedly mean additional

tough decisions. However, those businesses that can

adjust will survive. The business and cooperative world

has seen the unfortunate consequences of not adjusting, which has led to bankruptcy of many businesses. ■

Facility closures always a tough decision for co-ops

South Dakota Wheat Growers is shifting more of its grain to modern shuttle-train loading facilities, such as this

one, which has resulted in some older

elevators being closed. Photo by Cheryl

Crase, courtesy South Dakota Wheat Growers

Rural Cooperatives / March/April 2003 17
18 March/April 2003 / Rural Cooperatives

By Randy Ziegenhorn,

Editor’s Note: Ziegenhorn is a guest lecturer in anthropology at

Cornell College and a fulltime farmer in west Illinois. This article

is based on a prize-winning book he wrote, “Networking the

Farm,” published by Ashgate Publishing Co., Vt., in 1999.

n the mid 1990s, Iowa hog farmers, confronting the lowest prices in decades, sought to

improve their profitability through the formation of cooperative-like networks for producing

and marketing pigs. Most felt that economies

of scale could be realized by a production system that allowed

each member to specialize in some phase of the growing

process, from breeding to finishing. The problem that

emerged was how to organize such a network. Should the

organizer be a farmer or someone else? How should members be recruited, and why did so few networks get beyond

the talking stage? 

This study details several kinds of networks and argues

that success in forming a network has less to do with willingness to innovate and other factors that center on individual

choice than on several social-structural factors, including the

organizer’s level of acquaintance with the characteristics of

prospective members’ farms and specific ways in which the

network addressed those characteristics.

Imagine that your neighborhood is threatened by an

unwanted nearby real estate development. You could hire an

urban planner and summon your neighbors to a meeting in

order to enlist them in a plan of action to oppose it. Or you

could call up just your friends (people who think like you) and

try to persuade them to follow a similar plan. Or you could

spend time defining who would be most affected by the development, finding what characteristics they had in common and

earning their trust before proceeding. Which course would be

most likely to succeed?

This is largely the situation that Iowa’s family hog farmers

found themselves in during the 1990s. In 1995-1996, I carried

out an ethnographic study of many of these farmers whose

livelihood were threatened by declining prices and the emergence of large-scale corporate hog farms. Many farmers

sought ways to band together to survive. The idea that cooperative-like networks of farmers could provide more efficient

and profitable production emerged from land-grant colleges,

swine industry conferences and early networks themselves. 

Many foresaw the likely replacement of inefficient, on-farm

production with large-scale centralized facilities run by professional management and owned by farmer investors. Like the

homeowners described above, the key issue was, as one economist said, “the people problem.” How do you best organize

cooperation among farmers? That is, how do you get them to

go along with the plan? Many, particularly land-grant academics, saw the matter as one of distributing a carefully fashioned

plan to farmers who would adapt their existing operations to

the needs of the networked plan. 

Iowa State University Extension Service’s Team Pork

sponsored meetings around the state to convince farmers to,

essentially, buy in as investors in these projects. These meetings, like those of the urban planner mentioned above, did

little to tailor particular networks for particular farmers. The

unspoken assumption of the Extension plan seemed to be that

rational individuals could perceive optimal outcomes. Therefore, the process of organizing networks is largely a matter of

following the plan. In fact, as the experience of one failed

network showed, this rationality was often clouded by individual, social and economic factors. 

One network was formed among those farmers described as

“progressive enough to accept the networking concept,” by a

person we shall refer to as Farmer A. This network was comprised of large farmers with modern facilities and management

strategies who were looking for ways to not only survive, but

also expand. Farmer A himself held an advanced degree and

added his own expertise to the plans provided by Team Pork.

Their plan called for a $3 million growing and finishing facility

with each of the six members supplying early-weaned pigs.

Shares and debt were to be held proportionate to the number

of pigs each member contributed. They held numerous meetings discussing everything from interest rates to water. 

Despite the businesslike nature of the meetings, I found

much underlying dissatisfaction when I interviewed members

privately. Some were put off by the amount of debt they were

expected to assume, others claimed benefits were going to be

realized disproportionately by some, and others still expressed

skepticism about Farmer A having the necessary management

skills. As one member put it (in a typical farmer’s assessment)

“have you ever been by his place?” These reservations were

I

Network difficulties

Tales of two Iowa pork-producer networks 

show that bottom-up approach works best
serious enough that eventually all but Farmer A and one other

member withdrew from the project. 

In the end, it appears that two problems plagued this network: first, management attempted to impose a top-down,

one-size-fits-all production model which didn’t fit the needs

of the members; second, the manager’s own position in the

rural social structure and his own reputation prevented him

from understanding the complexities of each member’s farm. 

In short, Farmer A assumed that these progressive farmers

would rationally embrace the plan. That they did not was due

largely to a dense set of social and cultural constraints that kept

management from knowing the intimate details of each member’s farm—the kind of details that determine whether a particular network is right for them. After interviewing these and

many other farmers, I realized that despite dense social ties,

knowledge of a neighbor’s farm operation was largely limited to

what is seen when going by his or her place.

Veterinarian B occupied a different niche in his community’s social life than did Farmer A. Vet B knew a number of

his customers quite well. He knew not just the health status

of their herds, but also the details of their management

styles and financial condition. He was both a vet and a

trusted advisor. Like Farmer A, Vet B was looking for ways

to put together networks to help his customers survive. His

strategy hinged on the relationship of trust and on his

knowledge of individual farms. 

Vet B was able to develop a bottom-up plan and to fit the

plan to a group of farmers with similar production and financial needs. Rather than a group with “progressive attitudes,”

Vet B created a group with common needs. Rather than start

with a multimillion-dollar project, hit network pursued micro

projects aimed at building trust and reducing risk. His position within the rural social structure and the cultural values

that permit farmers to share information with a veterinarian,

rather than another farmer, gave him a better position. Unlike

Farmer A, Vet B depended not on what he knew or who he

knew, but on what he knew about whom he knew, and—crucially—what they didn’t know about each other.

Conclusion

What worked and didn’t work in these two cases was

repeated in numerous other farm communities. Farmers

were rarely successful in organizing networks while vets, feed

dealers and even accountants were able to exploit a structural

advantage successfully.

In recent years, Farmer A formed a small joint venture with

one of the original members in which each specializes in a production process. However, the vision of multi-million dollar

industrial production facilities was replaced by his embrace of a

low-tech European production method known as a hoop

house. In a hoop house, pigs are raised in greenhouse-like

structures with rigid wooden side walls. Baled cornstalks serve

as bedding and as a base for composting animal wastes. This

method still allows for such high-tech techniques as early

weaning and reduces odors and waste disposal problems. Many

such structures have been built in Iowa, testifying to their economy and practicality. In addition to his farm work, he has been

active in state and national swine producer organizations.

Vet B is part of a growing multi-partner, multi-county vet

practice. The original networks he created have continued to

evolve, according to the needs of their members. Now as

then, he scoffs at the top-down models offered by the Extension Service and favors the track record of his own bottomup approach. Although such networks may not pose a threat

to the industrial hog farms, they have helped strengthen their

members through cooperation. ■

Rural Cooperatives / March/April 2003 19
20 March/April 2003 / Rural Cooperatives

By Michael Boland and David

Barton

Editor’s Note: Boland is an associate professor of agricultural economics and associate

director of the Arthur Capper Cooperative

Center at Kansas State University. Barton is

a professor of agricultural economics and

director of the Arthur Capper Cooperative

Center at Kansas State University. This

project was funded under a cooperative

agreement with the Rural Business-Cooperative Service of USDA Rural Development.

A longer case study was presented at the

Farmer Cooperatives 2002 conference in St.

Louis and can be obtained by contacting

Michael Boland (785) 532-4449;

mboland@agecon.ksu.edu).

outh Dakota Soybean

Processors is a successful,

producer-owned soybean

business that was organized in 1993 and began

operations in 1996 to add value to its

members’ crop. “Our goal,” says CEO

Rodney Christianson “is to be financially strong and make a maximum value-added payment to our members

while maintaining growth and capital

stock. South Dakota Soybean Processors (SDSP) will maintain a competitive position in the marketplace by providing quality products to our

customers with highly efficient and

cost-effective processes.”

SDSP’s state-of-the-art soybean

crushing plant east of Volga, S.D.,

began operations in late 1996. The

plant was built to crush 16 million

bushels annually and has since expanded to 28 million bushels. In 1997,

SDSP crushed 13.4 million bushels,

increasing to 21.1 million

bushels in 1998, 24.1 million

in 1999, 26.2 million in 2000

and 26.8 million in 2001. 

The expansion in 1998

cost $1.8 million and was

funded primarily through

earnings generated in 1997.

Local soybeans are annually

processed into about

600,000 tons of soybean

meal, 157,000 tons of crude

soybean oil and 49,000 tons of soybean hulls. 

SDSP’s plant is on 47 acres, and the

co-op has an option to purchase an

additional 60 acres. The plant can currently process about 80,000 bushels per

day and has historically run at 88 to 95

percent of capacity. The plant generally

runs at full capacity from December

through May and then undergoes two

weeks of maintenance.

Most of the soybeans are trucked to

the plant. Trucks are weighed and

then sent to one of two receiving lines

that can process 15,000 bushels per

hour. The soybeans are sampled and

graded for moisture, foreign material

and other quality factors, which

impact the price. The plant has capacity to store 1.5 million bushels of soybeans, or about four weeks of operations. It can also store about 5,000

tons of soybean meal (about three days

of operations) and 30 million pounds

of soybean oil. 

Passing the profit test

South Dakota Soybean Processors

has been profitable since it began operations in 1996. 

“Anything that we do, first of all we

have to pass the test—do we remain

financially strong or do we get better

financially because of what we’re going

to do?” Christianson says. “If we make

this investment, will it then allow us to

pay a larger value-added payment?”

It has paid back to producers approximately 70 percent of all income each

year, retaining about 15 percent to be

paid back in future years. It keeps 15

percent as retained earnings for future

growth. The first shares of stock purchased in 1993 and 1994 for $2 each

have appreciated in value. Stock share

price traded locally at $2.49 in 1998,

$2.86 in 1999, $3.03 in 2000 and $2.67

in 2001. Later stock sales were priced at

S

Striking oil

South Dakota Soybean Processors 

finds new ways to add value to crop
Rural Cooperatives / March/April 2003 21

$2.25 and $2.50 and have also increased

in value. In addition, the local basis for

soybeans has narrowed by about 25

cents per bushel since the plant opened.

Since 1996, three board retreats

have been held and the core strategy

has been revised three times. “The soybean industry is very competitive, and

we need to keep track of what’s going

on in our industry,” Christianson says. 

At its last board retreat in 2000,

SDSP developed a five-year strategic

plan. The goals of this plan were to: 1)

maintain its competitive advantage in

processing soybeans at the lowest possible cost; 2) move its products up the

value-added food chain; and 3) develop

strategic alliances to help meet its goals

and objectives. 

SDSP plans to add an additional

20,000 bushels of daily capacity to further its ability to process soybeans at

the lowest cost. The co-op is committed to generating 50 percent of its revenues from high-margin, value-added

products. This means further refining

soybean oil. Four options (discussed

below) were considered for accomplishing these three strategies.

Turning soybean oil

into polyurethane foam

SDSP has acquired exclusive rights

to supply soybean oil to Urethane Soy

Systems Company Inc. (USSC) of

Princeton, Ill., for use in manufacturing SoyOyl, a polyol made from soybean oil which is a key chemical used in

making polyurethane foam. USSC

holds a patent on SoyOyl, which reacts

with other chemicals to form foam in

either flexible or rigid form. 

Flexible foam is typically used in

furniture, carpet padding, automotive

interiors and footwear. Rigid foam is

found in insulation, simulated wood,

flotation and packaging material. Substitutes for the product include traditional petroleum-based polyols. The

global market for the foam is about 12

billion pounds per year (4.6 billion

pounds of which is consumed in the

United States). The market has been

growing at 5 to 8 percent annually.

The price SDSP receives is tied to the

Chicago Board of Trade futures price. In

addition, SDSP receives a fee for every

pound of soybean oil used in manufacturing SoyOyl. SDSP acquired controlling interest in USSC majority voting

shares in December 2002. In addition,

SDSP had an option to purchase the

rights to a process for refining crude

soybean oil for use in industrial products, such as manufacturing SoyOyl.

Alliance formed 

with crushing co-op

Another group of Minnesota soybean producers formed a cooperative

in 2000, Minnesota Soybean Processors (MSP), to build an 80,000

bushels-per-day soybean-crushing

plant in Brewster, Minn. SDSP provided the co-op with a business plan

and construction-management team in

exchange for a fee equal to 10 percent

of the equity raised by MSP. At least

80 percent of that fee is reinvested as

equity in the plant, at a rate of $2 per

share. SDSP also entered into an

agreement to provide marketing and

management services, including dayto-day control of the plant.

“We looked at the [opportunity]

and decided it was something that fit

our business and industry,” Christianson says. 

The SDSP board of directors also

made available $1 million in interestfree loans to SDSP members who

wanted to invest in MSP. For every $4

invested in MSP, SDSP provided a $1

loan. Collateral for the loan is the

retained patronage returns not yet

redeemed back to the members from

1998 to 2000. For example, if a member

wanted to purchase 2,500 shares of

MSP stock (i.e., deliver 2,500 bushels to

MSP) at a $2-per-share charge, it would

require $5,000. However, a producer

would only be required to pay $3,750 in

cash. The additional $1,250 would be

covered by the loan and would be paid

off by the future redemption of retained

patronage refunds.

Marketing crude soy oil

SDSP was also looking for new customers for its crude soybean oil. Firms

such as Hunt Wesson, Procter & Gamble, Louis Dreyfus, ADM, Cargill and

AC Humko purchase crude soybean oil

and refine it for their own uses. However, these customers already had refiners supplying them with oil. SDSP

eventually signed a long-term supply

agreement to have all of its crude soybean oil processed by AC Humko, the

nation’s largest independent refiner of

soybean oil. SDSP was to supply three

of Humko’s plants in Illinois and Oklahoma with refined and bleached soybean oil. In addition, it purchased the

equipment for an oil refinery from AC

Humko and built a refinery next to its

Volga crushing plant. 

Christianson says USDA funding

helped the co-op with its expansion

efforts. “We were fortunate to be awarded

a USDA Rural Development [ValueAdded Ag] grant of $500,000 to investigate the possibility of vertically integrating into manufacturing soy diesel,

refining vegetable oil or soy protein concentrates such as lecithin,” he says. 

Organizational options

In 2001, SDSP began considering

continued on page 32

South Dakota Soybean Processors

crushed nearly 27 million pounds of its

members’ crop in 2001 and has acquired

the exclusive rights to supply soybean oil

for the manufacture of SoyOyl, which is

used in producing polyurethane foam for

furniture and carpet backing. Top photo courtesy Kansas State University. Others courtesy South

Dakota Soybean Processors
22 March/April 2003 / Rural Cooperatives

Beverly L. Rotan

Economist, USDA/RBS—Cooperative Services

ith the economic downturn, tragic events and

accounting scandals of the past year, how has

your local farm supply cooperative fared?

Was your cooperative able to sustain rising

and falling petroleum prices, severe drought

(in many areas) or even flooding? Financially, has your cooperative fared better, about the same or lost ground compared

to cooperatives with similar functions and factors—sales, 

product mix, etc? 

Comparisons with other cooperatives may help to determine whether your cooperative is doing well or poorly.

Trend and industry norm comparisons can provide a useful 

performance yardstick. ■

Table 1—Compare your farm supply cooperative1 with averages for cooperatives with similar functions

—————Size (2000)2, 3—————— ——————Size (2001)2, 3————— Your 

Measure/Item Unit Small Medium Large Super Small Medium Large Super co-op

Sell farm supplies only Number 73 44 26 9 73 44 26 9 ——

Total assets Mil. dol. 1.6 4.1 7.4 14.5 1.6 4.0 7.6 14.2 ——

Long-term debt Thou. dol. 60.6 295.4 552.0 2,137.1 77.6 272.6 627.9 2,150.4 ——

Total liabilities Thou. dol. 417.8 1,425.1 2,811.9 6,655.4 450.0 1,458.0 2,852.0 6,001.0 ——

Total sales Mil. dol. 2.6 6.3 12.9 27.4 2.6 6.7 13.7 28.0 ——

Total service revenue Thou. dol. 91.3 189.8 345.4 714.4 80.4 214.5 224.6 631.7 ——

Total revenue Mil. dol. 2.7 6.6 13.4 28.5 2.7 7.0 14.2 29.3 ——

Net income (losses) Thou. dol. 50.7 157.8 280.5 352.3 40.4 169.6 373.9 607.1 ——

Labor of total expenses Percent 54 54 55 54 55 53 53 53 ——

Patronage refunds received Thou. dol. 66.3 158.4 293.8 596.5 26.3 77.7 113.2 267.5 ——

Liquidity ratios

Current Ratio 2.24 1.60 1.42 1.30 2.11 1.56 1.52 1.46 ——

Quick Ratio 1.14 0.93 0.79 0.65 1.11 0.91 0.84 0.68 ——

Leverage ratios

Debt Ratio 0.26 0.35 0.38 0.46 0.28 0.36 0.38 0.42 ——

Debt-to-equity Ratio 0.34 0.54 0.62 0.85 0.38 0.57 0.60 0.73 ——

Times interest earned Ratio 4.68 4.17 3.79 2.10 3.15 4.64 5.48 2.84 ——

Activity ratios

Fixed asset turnover Ratio 8.15 5.97 5.94 5.91 8.32 6.71 6.43 6.42 ——

Total asset turnover Ratio 1.57 1.54 1.75 1.88 1.60 1.66 1.81 1.97 ——

Profitability ratio

Gross profit margins Percent 16.57 16.78 18.47 15.75 16.33 15.82 19.13 16.23 ——

Return on total assets before

interest and taxes Percent 4.19 5.51 5.73 4.90 3.80 5.83 6.61 6.99 ——

Return on total equity Percent 5.43 8.04 8.39 5.70 4.49 8.83 10.86 9.49 ——

1/ 100 percent of sales were generated from farm supply sales. 2/ Small = Sales are $5 million or less; medium = over $5 million to $10 million; 

large = over $10 million to $20 million; and super = over $20 million. 3/ There were 294 cooperatives surveyed in both years.

How does your local farm 

supply cooperative rate?

MANAGEMENT TIP

W
Rural Cooperatives / March/April 2003 23

Table 2—Compare your mixed farm supply cooperative1 with averages for cooperatives with similar 

functions

—————Size (2000)2, 3—————— ——————Size (2001)2, 3————— Your 

Measure/Item Unit Small Medium Large Super Small Medium Large Super co-op

Market farm products and

sell farm supplies Number 11 10 23 23 11 10 23 23 ——

Total assets Mil. dol. 1.4 4.1 8.5 19.0 1.4 4.2 7.9 19.9 ——

Long-term debt Thou. dol. 47.9 436.8 1,242.4 2,691.2 70.6 455.2 934.3 2,856.7 ——

Total liabilities Thou. dol. 382.9 1,690.3 3,861.4 8,984.2 418.7 1,661.9 3,254.8 9,776.0 ——

Total sales Mil. dol. 2.9 7.5 14.9 33.7 2.8 7.1 13.5 38.0 ——

Total service revenue Thou. dol. 114.1 297.7 596.9 1,525.9 123.0 298.9 555.6 1,455.1 ——

Total revenue Mil. dol. 3.0 7.9 14.0 35.8 3.0 7.7 14.4 40.2 ——

Net income (losses) Thou. dol. 30.7 70.1 184.4 492.5 26.8 141.8 293.4 628.6 ——

Labor of total expenses Percent 51 50 52 49 52 52 51 50 ——

Patronage refunds received Thou. dol. 12.8 51.7 157.1 196.7 25.7 54.2 161.3 309.7 ——

Liquidity ratios

Current Ratio 2.14 1.33 1.30 1.37 1.94 1.35 1.34 1.33 ——

Quick Ratio 1.30 0.70 0.72 0.68 1.02 0.64 0.74 0.66 ——

Leverage ratios

Debt Ratio 0.26 0.41 0.45 0.47 0.33 0.40 0.41 0.49 ——

Debt to equity Ratio 0.36 0.71 0.82 0.90 0.50 0.66 0.71 0.96 ——

Times interest earned Ratio 3.51 1.94 2.14 2.29 2.68 3.07 2.99 2.47 ——

Activity ratios

Fixed asset turnover Ratio 7.59 5.58 5.46 5.78 10.68 5.77 5.77 6.51 ——

Total asset turnover Ratio 1.99 1.83 1.63 1.78 2.02 1.71 1.71 1.90 ——

Profitability ratio

Gross profit margins Percent 12.77 14.40 15.96 15.83 13.14 14.15 15.76 15.50 ——

Return on total assets before

interest and taxes Percent 3.04 3.80 4.60 5.55 3.49 5.46 6.04 6.02 ——

Return on total equity Percent 4.64 4.13 5.10 6.68 3.92 7.82 8.65 8.56 ——

1/ 50 to 99 percent of sales were generated from farm supply sales. 2/ Small = Sales are $5 million or less; medium = over $5 million to $10 million;

large = over $10 million to $20 million; and super = over $20 million. 3/ There were 294 cooperatives surveyed in both years.

The Southern Kansas Cotton Growers Cooperative bas been bolstered by a bumper cotton crop, the best in

the cooperative’s seven-year history. Manager Gene Latham said he was both surprised and enthused by the

results. Some members had yields nearly double the co-op’s 500-pound per acre average. Timely rains helped the

2002 season, while the two previous seasons had been hurt by drought. The cooperative ginned a record supply of

cotton, topping 16,000 bales. Vic McClung, a member of the cooperative board, said he was glad he and his brother

stuck with cotton and encouraged others to explore it in coming years. McClung said they had been experimenting

with cotton in the1980s before the cooperative was born and then started planting regularly once the gin was created. Unfortunately, the southeast was the only sector in the state that had a normal crop year last fall. ■

Bumper crop buoys Kansas cotton co-op 
24 March/April 2003 / Rural Cooperatives

By Catherine Ford and Robert

Cropp

University of Wisconsin Center for

Cooperatives

Editor’s Note: Cropp is professor emeritus

in the Department of Agricultural and

Applied Economics and recent director of

the Center for Cooperatives, both at the

University of Wisconsin-Madison. Ford is

a research assistant in the Department of

Agricultural and Applied Economics.

s farm size significantly

increased in the late 20th

century, so did the size of

farm machinery required

to operate those farms.

With limited acreage and significantly

higher associated operating cost per

acre, many small- and medium-sized

farms could not justify buying a full set

of machinery. Consequently, many

farmers have turned to working with

custom operators to plant and harvest

their crops. 

But working with custom operators

has been a problem for many farmers

due to timeliness issues when planting

and harvesting. For example, there is

about a ten-day window in which the

best quality forage can be harvested.

This challenges custom operators trying

to harvest several farms during this same

window of time. Many farmers are looking for a solution to their equipment

needs for planting and harvesting.

The article, “Shared Machinery Old

Idea, Still Good One,” discusses the

joint purchase of machinery by farmers

as a way to reduce individual cost, noting that sharing machinery in the Midwest “is an old practice that still makes

good sense today” (Fykson, p11).

Organizing a machinery cooperative is

one alternative to consider for sharing

expensive machinery costs.

A major advantage of a machinery

cooperative is that it addresses and

controls the timeliness issue. “This

could occur by coming to a consensus

among the members to limit the number of acres that the machinery can be

used on within a year. This is different

from working with a custom operator

since, in that arrangement, the custom

operator decides how many acres that

he or she commits to during the year”

(Drye and Cropp, p.2). 

Another advantage is the reduction

in capital individual farmers must invest

in machinery. A group of farmers can

spread the cost of machinery over several farms and acres. Further advantages include economies of scale applied

to equipment purchased or leased, savings in operating costs (such as fuel and

insurance) and addressing labor shortages during planting and harvesting.

Cost sharing in a machinery cooperative highlights the greater capacity

equipment, labor time reduction, better access to new technology, lower

risk burden and increased social

opportunities. But risks associated

with a machinery-sharing cooperative

should also be considered prior to coop formation. Timeliness issues are

not completely dissolved with a

machinery cooperative. More than

one farmer-member may still want to

use a piece of equipment during the

same time. A solution might be a policy in which a harvesting schedule prioritizes which farmers need to use

equipment when.

Another challenge involves the

establishment and maintenance of

good working relationships among

members. If members have major differences in how the cooperative ought

to operate, then the benefits of working together may diminish and the

A

A shared harvest

Machinery co-ops could help small, Upper Midwest dairy farms

USDA Photo
Rural Cooperatives / March/April 2003 25

cooperative may not be successful.

While there are opportunities and limitations for machinery cooperatives for

small Wisconsin dairy farmers, it is

important to remember that irrespective of what decision farmers make

(custom operation, individual ownership or organizing a machinery cooperative), the decision should be compared

with other alternatives. 

Canadian machinery co-ops

Farm machinery cooperatives in

France developed after World War II

“to encourage the collective purchase

and use of scarce farm equipment”

(Harris and Fulton (CUMA...) p 14). In

Canada, several types of machinery

cooperatives have recently developed,

based, in part, on the French system as

well as to move away from machinery

syndicate pools, which had no legal status and thus could not take action

when members broke an agreement. 

While virtually all machinery cooperatives provide equipment rental and

use, there are a number of variants,

including piece sharing, whole-set

sharing, production pooling and labor

sharing. Following are examples of

machinery-sharing co-ops in Canada. 

■ Piece-by-piece machinery sharing can be illustrated with the CUMA

system in Quebec. CUMA owns all of

the machinery and equipment and

members are legally bound by contracts, “thereby eliminating the difficulty of having members break the

informal syndicate agreements. Second, the liability of members of a

CUMA is limited to their initial share

investment; personal guarantees are

not required” (Harris and Fulton

(CUMA...) p 14). CUMA’s structure

allows sharing individual machines

among sub-sets of members through

an activity branch, which corresponds

to a different farm operation or

machine. These activity branches are

developed following the identification

of machinery and equipment needs;

each branch member then provides a

time and/or unit commitment for that

piece of machinery for the duration of

the contract. 

■ Sharing of complete farm

machinery sets occurs in cooperatives

in Saskatchewan. Within these shared

machinery-set cooperatives, production may or may not be pooled. However, both types pool labor. “Sharing

labor enables members to take advantage of, or develop, expertise in particular areas. For example, one member

may be in charge of machine repairs

and maintenance, while another maintains the financial records for the coop. Sharing labor can also allow some

members to work either more or less,

depending on their needs. For example, one member may wish to exploit

off-farm employment opportunities,

while another may be interested in

farming fulltime but does not have

enough land to do so (Harris and Fulton (Farm...) p 7).”

■ Pooled Production is a system

where the cooperative’s members

assign their land to the cooperatives’

production decisions, which decides

how, what and when to produce what

crop(s) on each member’s land(s).

Lakeside Farm Machinery Cooperative

pools production. The members retain

ownership of the land. However, seed

or grain produced becomes part of the

cooperatives’ overall pool. 

■ Non-pooled production is illustrated by the Kipling Agricultural

Machinery Co-op. Members make production decisions independently. However a group strategy is formed “to

complete key farm operations, such as

seeding and harvesting (Harris and Fulton (Farm...) p 10).”This strategy helps

to coordinate the production and harvesting among the individual members. 

Table 1—Cost-benefit analysis of shared machinery in Canada

Piece-by-Piece

• Greater degree of

independence involved in

production when individual machines are shared,

as opposed to entire sets;

• Greater freedom in

production decisions for

members who have dissimilar production practices and/or do not want

to change production

practices;

Pooled Production

• Avoids scheduling

conflicts and ensures that

operating costs and revenues are divided in a fair

and equitable manner;

• New members gradually build equity in the

operation; a member can

join the cooperative with

a land base and can

build equity by having

income deducted until

the land base and equity

contributions are in

equal proportions;

• Encourages members to test new options

(crops, farm techniques,

and equipment) since

there is a reduced risk to

individual members.

• Loss of independence: members make

their production decisions

together and must unanimously decide how, what,

and where to produce;

Shared Labor

• Labor sharing has

alleviated the problem of

getting reliable replacement help

• “Time savings is

another important benefit. Since joining the coop, for example, one

member’s land was

seeded in four and a half

days and harvested in

three. When farming

independently, the same

member required twenty-one days of labor to

seed and fifteen days to

harvest.”
■ Sharing labor occurs in the

shared machinery set cooperatives in

Saskatchewan as well as some of the

CUMA in Quebec. Farm labor activity

branches within the CUMA takes

charge of “paying the laborers and

undertaking associated administrative

duties, including providing technical

support and training” (Harris and Fulton (CUMA) p. 20). In the Leclercville

CUMA cooperative, replacement

employees are hired when a member

needs to leave his/her operation. This

greater supply of skilled labor enables

Leclercville member producers to leave

the farm for longer periods of time.

Strengths and weaknesses of 

Canadian machinery co-ops

Strengths of machinery cooperatives

in Canada include: 

■ Cost savings and access to newer,

more efficient equipment;

■ “Access to a greater pool of

knowledge and resources...such as

labor, experience, and ideas” (Harris

and Fulton, (An Idea... p. 2);

■ Price discounts on inputs due to

the greater volume of business; this can

improve farmers’ buying power from

input suppliers. (Harris and Fulton,

(Farm...p. 3);

■ Shared financial risk and minimized individual investments ensure

the most efficient use of invested capital and reduce operational costs, which

allows for the purchase of more efficient and powerful machinery; 

■ More rapid equipment turnover

to obtain a higher resale value; 

■ A positive social experience from

working together and sharing experience

and skills; “re-instill basic rural values

with their neighbors, such as co-operation and helping one another”(Harris

and Fulton (CUMA...p. 19)”;

■ Training—sharing experiences

and skills especially with respect to new

technologies; 

■ Economies of scale in machinery

purchased or leased (larger equipment

size); 

■ Share labor and enable a younger

generation of people to get involved in

farming without a large debt burden. 

Co-op weaknesses include:

■ Conflicting time requirements.

“The fear that two or more members

might have to use a particular machine

at the same time is one of the biggest

reasons why many Saskatchewan farmers are reluctant to share farm machinery, especially seasonal equipment such

as seeders and combines”;

■ “Potential loss in income from

not being able to use a machine at the

most optimal time”; 

■ Carelessness: “The risk of sharing

equipment with a member who is inexperienced or careless, and the associated increased maintenance and repair

costs, can quickly turn people off the

idea of sharing farm machinery.”

Survey of Wisconsin

custom operators

Custom operators surveyed in Wisconsin indicated what kind of custom

work they provide for dairy farmers

and the different types of machinery

they use. They were also asked about

the financing methods they select for

each type of equipment.

The survey sought to discover the

different types of machinery required

for custom operations and the different

means of financing, turnover rates and

problems encountered. Twenty custom

operators were contacted by mail and

asked to complete a confidential survey.

Only five responded. Nevertheless, the

responses provide some insight about

the equipment and operations of custom

operators. This information has application to organizing a machinery cooperative. Table 2 shows the different acreage

sizes for different types of custom work.

These are the averages for individual

farmers served by custom operators

Purchasing equipment appears to be

more prevalent than leasing, irrespective

26 March/April 2003 / Rural Cooperatives

Table 2—Reasons custom operators leased or purchased different

types of machinery

Reasons to Purchase Reasons to Lease

In general • Equity accumulation • Leases can work for new pieces

but usually converted to purchase

Haybine • Don’t need to replace 

machine as frequently

Hay Rake • Lease provided no benefits; 

it is preferred that you 

purchase the item

Forage chopper • At the time, a purchase was • 3-year lease and then purchase it; 

more efficient. it helps with cash flow since 

it’s too expensive to start with

Grain combine • Too costly for my operation 

to have sitting seasonal; 

leasing makes more sense

Forage wagon • Based on need ownership is 

much cleaner than leasing this 

equipment; damage occurs 

and wear;

• No fear of broken leases

Trucks for forage • Not very expensive;
Rural Cooperatives / March/April 2003 27

Table 3—Recommendations for equipment purchase or lease by a typical machinery cooperative of small

dairy farmers.

Haybine

Hay Rake

Forage Chopper

Grain Combine

Grain Cart

Forage Wagon

Forage Truck

Windrow Merger

Packing Tractor

18’ self-propelled

High capacity

wheel rake

Self propelled, 12’

hay head, 

6 row corn head

Class 5 machine

with 6 row corn

head and 18-20 ‘

platform, may be

able to handle

beans, other small

crops

500-600 bushel

grain cart

4-5 combination

boxes for front and

rear unload

Tandem or tri-axle

with 20’ boxes

Double windrow

merger

125-150 horsepower mechanical,

front-wheel drive

with loader or tractor style or blade;

Recommend only

front wheel, rather

than 4-wheel-drive

due to the small

size

$70K

$8,500

$225K

$160K

$11K

$15K per unit 

($60K-$75K)

New boxes 

($35K-40 K) with

used truck, don’t buy

new trucks often,

with new truck, $75K

$38K-39K 

$70K-85K

$15K-20K

$60K-70K 

$20K

$2,000-$2,500

Not much leasing

$10K

$12K-15K

Buy the machine

because of the high

lease price

Normally, don’t

lease this because

of the high wear 

Lease rates are

very high, recommend that people

buy new

For this size of

operation, 1,000

acres, would recommend leasing or

custom operation,

but if the acreage

went up to 2,000,

then it might be

worth it to buy

Leasing is common

since it is only used

for a few weeks

each year. In order

to deal with high

demand, lease contracts are for 3

years, lease-to-purchase

Not much leasin

since it has high

depreciation rate,

high level ow wear

Common to hire

truck owners. 

Very high wear, so

it’s preferable to

purchase; lease is

very high rate,

close to 30%

Consider leasing,

since it’s only used

for seasonal application. 

3-4 years

3-4 years

4-5 years, depending on how heavy

it’s used

3-4 years

Lasts 6-10 years

without problems

5 years or until it

dies

Lasts about 10

years

3-4 years

8-10 years

Contract for 2-3

years, normally

Lease for 3 years 

Leasing agreement

is for 3 years, with

option to buy

3-4 years

3-4 years

Machinery Type Size and style ––Cost to buyer/ lessee–– Purchase or –––––Turnover Rate––––

Purchase Leasing Lease? Why? Purchased Leased

Price Rate
of equipment type. However, leasing was

more prevalent with the more expensive

equipment, such as a grain combine.

Machinery co-ops for

small dairy farmers

A set of assumptions were made for

a potential machinery cooperative

organized by relatively small Wisconsin dairy farmers. It was assumed that

10 dairy farmers would organize the

cooperative. Each farm would have 500

acres of cropland comprised of 250

acres of hay or haylage and 250 acres of

corn, of which 150 acres would be harvested for corn silage and 100 acres for

grain. In total, equipment would be

required for 5,000 acres: 2,500 for haylage and 2,500 acres for corn (1,500 for

corn silage and 1,000 for grain).

In order to obtain recommendations

on the type and size of equipment

required, a machinery dealer was contacted who provided recommendations

as to whether it was more feasible to

purchase or lease the equipment. The

results of these recommendations are

provided in table 3. 

If all the equipment were purchased,

between $740,000 and $760,000 of capital would be required. Depending on

the lender’s equity requirement,

between $380,000 to as much as

$600,000 would be required as equity

capital for equipment purchased. On a

per-farm basis (10 farms), this is very

feasible, at $38,000 to $60,000 per farm

as compared to the alternative of farmers purchasing their own equipment. 

The leasing alternative releases the

capital requirement for purchase, but

farmer members in the cooperative

would incur annual lease payments.

But again, these lease payments would

be lower per individual farmer member than if they leased the equipment

independently. 

For purchased equipment, it is recommended that new, rather than used,

equipment be purchased. Individual

farmers often purchase used equipment

to reduce costs. But, for an organized

machinery cooperative, new equipment

enhances the reliability of the equipment.

There are less chances of down time for

repairs and, therefore, a greater probability of staying on the harvesting schedule. 

Guidelines to organizing

a machinery cooperative 

Numerous issues must be addressed

by dairy farmers seeking to organize a

machinery cooperative. Some of the

more important issues include: articles

and bylaws, organizational structure,

initial equity investment, how to handle operating capital and more specific

operating polices. In considering each

item, perspective members should:

1. Discuss all factors regarding the

cooperative structure and operating

procedure thoroughly.

2. Prepare a detailed written membership agreement.

3. Choose cooperative members

with similar attitudes and values

regarding farming practices.

Organizational structure

Wisconsin state statutes require that

a co-op have at least five members. A

minimum of three board members

must be elected, assuming there are

fewer than 50 members. Depending on

the size, the cooperative could be managed by consensus of the members or

with a general manager who is not a

member. In addition, support staff

(such as mechanics, bookkeepers and

machinery operators) may be hired.

Articles, bylaws and policies

Articles provide the overall purpose

and broad organizational structure of

the cooperative. Bylaws provide more

specific operating guidelines, including

the number of board members, membership qualifications, distribution of

any net revenue, redemption of equity

when a member leaves the co-op, how

the cooperative would be dissolved, etc.

Both articles and bylaws require

approval by a two-thirds of members

voting. The board establishes more

specific operating policies, including

specific information regarding the daily

operations of the cooperative, such as:

1. Equipment Rates or User

Fees—This is based on an analysis of

operational costs, and may be completed with consolation with a third party,

such as university extension.

2. Equipment Depreciation—

There are various options for determining depreciation rates. They all

have different impacts on taxes and

financial reporting of the cooperative.

3. Equipment Storage—Should the

equipment be stored on the property of

the members or should an alternative

location be secured? If stored by members, how should they be reimbursed.

4. Equipment Insurance—How

much and what type of insurance

should be carried on the equipment?

5. Equipment Maintenance and

Repairs—How should maintenance

and repairs be charged to members?

This may be a part of the equipment

rates or user fees.

6. Equipment Retirement—When

should the equipment be replaced?

7. Fuel Purchasing and Storage—

How should the cooperative purchase

and store fuel for the equipment?

8. Source of Labor—Should the

members supply labor or should the

cooperative hire employees?

9. Schedule of Usage—Who has

priority of usage?

10. Rules of Conduct Regarding

Usage—What condition should the

machinery be in when the user member returns it?

11. Operational Downtime—How

should this be handled?

Initial equity investment

The establishment of the cooperative

requires an upfront equity investment

by those who wish to join the cooperative. The numerous options may include

a flat fee and/or a fee based on participating acreage. The logic behind the

participating acreage fee is to create

ownership of the cooperative based on

percentage of usage of the equipment.

Members may have concerns about this

requirement if they have proportional

ownership without proportional voting

power. But most state cooperative laws

allow for only one vote per member

regardless of investment or patronage of

the cooperative. 

28 March/April 2003 / Rural Cooperatives

continued on page 33
Nilsestuen, Ziewacz head 

Wisconsin ag office

Rod Nilsestuen, president and CEO

of the Wisconsin Federation of Cooperatives (WFAC) for the past 24 years,

has been named

by Wisconsin

Gov. James Doyle

as his new secretary of agriculture, trade and

consumer protection. For the past

four years,

Nilsestuen also

headed the Minnesota Association of Cooperatives. Nilsestuen subsequently chose Judy Ziewacz as his

deputy. She has been executive director of the Cooperative Development

Foundation and vice president of

domestic operations for the National

Cooperative Business Association

(NCBA) in Washington, D.C. Ziewacz

earlier had been communications

director for the National Milk Producers Federation and WFAC director of

government affairs.

Bill Oemichin, current WFAC

CEO, said the state could make “great

use of Nilsestuen’s knowledge of agricultural and

rural issues.”

He spearheaded

the overhaul of

the Wisconsin

Agricultural

Marketing Act,

played a pivotal

role in creating

the state’s milk

promotion

board and corn and soybean marketing

boards, and later sparked development

of Wisconsin Dairy 2000, the state

program that assemble dairy industry

leaders to improve their economic and

political environment. 

Nilsestuen formed Cooperative

Development Services, a first-of-itskind model to provide technical services and development assistance for

rural and urban cooperatives in Wisconsin, Minnesota and Iowa. He

chaired the National Rural Cooperative Development Task Force, which

led to the formation of 17 cooperative

development centers across the nation.

For two of his seven years as a director,

Nilsestuen chaired the NCBA board.

Va. Tech NICE site;

NCFC Sets PAL date 

A revamped National Institute on

Cooperative Education (NICE), now

focusing on youth only, will be conducted July 27-31 on the campus of

Virginia Polytechnic Institute and State

University at Blacksburg, Va. Dixie

Watts Reeves, agricultural economist at

the university, is directing the program.

She had been active in previous youth

education programs at NICE when it

was sponsored by the National Council

of Farmer Cooperatives (NFC). NICE

will include a tour of Roanoke area

cooperatives. About 100 students are

expected. For more information, contact Reeves at (540) 231-6153 or dixie@VT.edu . Meanwhile, NCFC will

replace the young cooperators segment

of the old NICE program with the

new, Political Awareness and Leadership (PAL) development program, to

be held in conjunction with its 6th

Annual Washington (D.C.) Conference, June 6-10. For more information,

call (202) 626-8700. 

TFC regains profitability

after $1.8 million in cuts 

A four-point working capital

improvement strategy implemented in

2002, coupled with a $1.87 million cut

in operating costs, brought Tennessee

Farmers Cooperative (TFC) back into

profitability after a $7 million loss in

2001. The improvement came despite

a sales decline of $30 million, to

$400.2 million. TFC’s recovery was

triggered in

part by an 8.7

percent

upsurge in

fuel volume,

opening its

first tire

warehouse,

selling record

fertilizer tonnage, and

extensively

renovating its

feed mills.

TFC’s goal for 2003 is to achieve $8

million in net income and to increase

purchases from its 69 member cooperatives from 82 percent to 84 percent

of their total purchases, says Bart

Krisle, chief operating officer. 

A key component of the four-point

program is a long-term, variable rate

bond program offered to current and

retired employees and their families. A

goal of $4.5 million has been set for

July 31, 2003. Minimum investment is

$1,000 for five years. “It’s a way to build

more permanent financial strength

Rural Cooperatives / March/April 2003 29

NEWSLINE

Compiled by Patrick Duffey

Rod Nilsestuen

Judy Ziewacz

TFC’s new tire 

warehouse.
30 March/April 2003 / Rural Cooperatives

while giving employees an attractive

investment option, “ Krisle said.

Kansas co-op leader

Joe Lieber dies 

Joe Lieber, president of the Kansas

Cooperative Council since 1986 and a

prominent state and national cooperative leader,

died Jan. 10.

Lieber was a

strong proponent of

cooperative

education who

improved the

director development

program in

Kansas and established the council’s

cooperative hall of fame. He was

instrumental in placing a co-op basics

education program for employees on

the council’s Web site. 

Lieber served on the advisory committee for the Arthur Capper Cooperative Center at Kansas State University

and was on the executive committee of

both the National Cooperative Business Association and National Council

of Farmer Cooperatives. He had been a

high school teacher and sports coach.

He had been active in recent years in

efforts to reshape the future of cooperative education, particularly the youth

component. Memorials may be sent to

the Capper Center.

His council position will remain

open during the current legislative

season. Diane Gruver, executive assistant, will take on expanded council

duties while legislation monitoring

will be handled by member co-op 

representatives.

AgriBank top co-op bank

The merger of Omaha-based

AgAmerica with AgriBank of St. Paul

creates the largest cooperative bank in

the nation, with assets topping $31

billion. AgAmerica, the Omaha

regional Farm Credit System bank,

served customers in Iowa, Nebraska,

South Dakota and Wyoming. The

Omaha bank will carry the new name

of FCS America and continue to serve

customers in that region. AgriBank

already serves bank customers in 11

other states. William Collins, AgriBank president, will continue to serve

as president of the enlarged bank.

The St. Paul bank employs about 275

people and already was the largest

farm lender, with $22.2 billion in

farm operating and mortgage loans

outstanding with 50,000 owner-borrowers. Adding volume from

AgAmerica pushes the total to $28.9

billion as of Jan. 1. Customers of

Farm Credit Services in AgriBank

saved an estimated $285 million in

lower interest costs last year.

producer group, cooperative, and

majority-controlled producer-based

business venture projects must involve

an emerging market. An emerging market is defined as a market that is new to

the applicant. Thus, if a cooperative has

not marketed processed lamb in the

past, it would be considered an emerging market for that cooperative.

How does USDA decide who gets

grants? 

RBS reviews all applications received

by the closing date of the RFP for eligibility and completeness. Those applicants or projects that are ineligible are

removed from the selection process as

are applications that are incomplete.

The remaining applications are

reviewed by three individual reviewers—two are academics with degrees

and experience in agribusiness and one

is a federal employee with agribusiness

experience. The three reviewers evaluate the application and give it a score.

The three scores are normalized (to

compensate for any tendencies on the

part of the reviewers to typically score

applications high or low) and then averaged. Any applications where the difference between the normalized scores for

the three reviewers is significantly different receive two additional reviews.

The high and low scores are then

thrown out, with the remaining three

scores averaged. 

Then, the applications are ranked by

the average, normalized scores and presented to the RBS administrator, who

determines if the ranking needs to be

revised to make sure the agency funds

innovative projects, projects in underserved areas, or to make sure that grants

will be awarded throughout the United

States Then, the agency funds as many

projects as it can based on the final

ranking and the money available, as

long as the projects score above average.

How much money is available for

the grants and how many grants will

be awarded? 

The 2002 Farm Bill allocated

mandatory funds of $40 million to be

shared by the VAPG Program, the

Agricultural Innovation Centers, the

Agricultural Marketing Resource Center and university research on valueadded activities. The VAPG Program’s

share of the money is approximately

$30 million. RBS will award grants of

up to $500,000 each to as many eligible applicants with acceptable proposals as it can, based on the funding it

receives each year. In 2002, 231 grants

were awarded out of 714 applications.

How long will the program 

continue? 

The 2002 Farm Bill authorizes the

program through 2007. At that time,

Congress can decide to extend the program or allow it to expire.

How can I apply for a grant? 

You must submit an application to

RBS during the open period of the

RFP. It is important that you carefully

read the instructions in the RFP and

submit a complete application package.

For more information about the program, you can access RBS’ Website at

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

vadg.htm or you can contact your State

Rural Development office. ■

Value-Added Corner continued from page 11

Joe Lieber 
Role of rural culture & values 

One approach that may help

strengthen linkages between co-ops

and local communities may be for

cooperatives to begin understanding

and marketing “themselves to members, partners and stakeholders as bearers of rural culture and values” (Fairbairn). Given the recent Chapter 11

filings by Farmland and Agway, the sale

of assets by both Minnesota Corn

Processors and Agrilink Foods and the

conversion of Dakota Growers Pasta,

broader, more encompassing dialogues

may be needed to help sustain a threeway partnership between cooperatives,

members and local communities. 

“A cooperative is a user-owned business from which benefits are derived and

distributed on the basis of use”(Dunn).

Organized for member use, cooperatives

have a degree of community quite distinct from other forms of business and,

in particular, from investor-owned forms

of business. Investor-owned businesses

seek to increase sums of capital held,

invested and re-invested. Fluidity is

prized and rewarded. The fundamental

purpose of a cooperative, however, is to

provide a flow of service (broadly

defined) over time to a community of

users to meet their needs. 

A cooperative is unlike an individual

proprietorship in that the community

of users owns the organization and

governs it based on principles of democratic process. These characteristics

embed the organization in its owneruser community. Agricultural cooperative users are, in the main, located in

rural areas. As such, this “incorporates”

them within rural communities. They

are developed and emerge with a set of

cooperative values and principles that

reflect, to varying degrees, their community’s values and principles. 

Those committed to rural living

may wish to de-emphasize “either/or”

decision making (that is, cooperative

vs. individual farm survival) and begin a

dialogue by asking themselves how

they wish to live, where and how those

values and goals are obtainable within

the broader rural community. ■

Alto Dairy GM Retires

Larry Lemmenes, president and

general manager of Alto Dairy Cooperative at Waupun, Wis., for the past 9

years, retired Jan. 27 after 18 years with

the co-op. Alto has 800 members and

operates two cheese plants and several

milk-replacer plants. The board has

hired a consultant to find managerial

candidates while the executive board

handles interim operations. Alto’s sales

for fiscal 2002 reached $432.6 million,

up $28 million. Cheese production set

a record at 206 million pounds. Pre-tax

income reached $2.1 million. 

Agway selling Telmark; 

CEO Cardarelli to step down

Agway Inc. has sold Telmark, its leasing company, to Wells-Fargo Financial

Leasing of Des Moines. This was the

last of four divisions sold since last fall as

part of Agways’s post-bankruptcy reorganization. The deal was approved by

the U. S. Bankruptcy Court of the

Northern District of New York. 

CEO Donald Cardarelli has also

told the Agway board he plans to retire

April 1 after 19 years with the cooperative. Cardarelli will be replaced by

Michael Hopsicker, newly named chief

operating officer. He most recently

served as executive vice president of

agriculture and energy and president of

Agway Energy Products, a post he will

retain under the realignment. 

The sale includes about $650 million in lease receivables. Most of the

225 employees, including management,

will be retained. Telmark offered lease

financing for equipment, buildings and

vehicles within the continental United

States. It served 20,000 farmers, related

agribusinesses and selected commercial

businesses. Telmark’s profits rose an

estimated 17 percent last year, to $14.3

million, based on sales of $90.2 million. 

CF eyes plant shutdown

Natural gas prices that have tripled

since late February have forced CF

Industries to reduce production of

nitrogen fertilizer by 80 percent at its

plant in Donaldson, La. However, it

plans to keep all of its 290 employees

engaged in training and upkeep. CF

said it had ample fertilizer supplies for

the spring season to serve its cooperative members in the United States 

and Canada. Natural gas accounts 

for almost 80 percent of a plant’s production costs.

Cal/West Seed, Senesco in pact

Cal/West seeds has signed a development and licensing agreement with

Senesco Technologies Inc., which will

enable the firms to incorporate Senesco

technology into the enhanced, proprietary alfalfa varieties and other forage

crops being developed by Cal/West.

Paul Frey, Cal/West president, said

“Added value through innovation in

research is the cornerstone of our business. Successful development of commercialization of this technology is of

primary importance to our company.”

The cooperative of nearly 550 membergrowers is based at Woodland, Calif.,

and markets proprietary alfalfa varieties

to customers across the globe. It is the

nation’s largest member-owned seed

production cooperative. 

Dilland succeeds Wosje

as Michigan Milk CEO

Michigan Milk Producers Association (MMPA) Chairman Elwood Kirkpatrick has

announced the

selection of

John Dilland,

the co-op’s

director of

finance, to be

the new general

manager. He

succeeds Walt

Wosje, who

Rural Cooperatives / March/April 2003 31

Closures continued from page 16

Walt Wosje 
was to retire

after the

March 18

annual meeting. Wosje

spent 37 years

in the dairy

business and

was the cooperative’s first

general manager from outside the organization. He

was credited with reviving the “super

pool” on a number of occasions, each

time regaining over-order premiums

for members. 

In refining its business, he sold

MMPA’s milk bottling operation to

concentrate on marketing Class I

bulk milk to major bottlers and 

consolidated manufacturing plants. 

In partnership with Leprino Foods

Inc., MMPA invested more than $26

million in a new plant at Allendale

and remodeled its Remus location.

Wosje led these successful moves,

which stand as the base of the cooperative’s current financial standing

and success. 

Dilland joined the cooperative in

1975 as its controller. He holds a bachelor’s degree in animal science from

North Dakota State University and a

master’s degree in business administration from Ohio State University. 

Dakota Pride, Canterra form

Merridian Seeds venture

Dakota Pride Cooperative of Bismark, N.D., has formed a joint 

venture with Canada’s Canterra

Seeds. The new business, Merridian

Seeds LLC, will serve 105 Dakota

Pride and 160 Canterra seed growers.

Merridian will be owned by the farmers who grow the seed. The firm is

scouting for another 70 growers in

the state to invest in the venture.

Merridian plans to acquire top seed

varieties of peas, wheat, flax, canola,

barley, dry beans and soybeans

through Canterra to become one of

Canada’s larger seed companies.

LOL nets $98 million;

consolidating feed mills

Thanks to proceeds won in a vitamin price-fixing lawsuit, Land O’

Lakes (LOL) net earnings reached

$98.9 million for 2002, up from $71.5

million in 2001. Long-term debt was

cut by $55 million, but sales were

essentially flat, at $5.8 billion. Its dairy

foods business lost $32.1 million after

posting $50.7 million in earnings in

2001. Its Agriliance agronomy joint

venture lost $1.8 million, but seed

earnings more than doubled, to $8.3

million. LOL was hurt by commodity

price declines, competitive pressures

and milk supply/processing demand

issues in the Upper Midwest, and startup costs at its West Coast Cheese and

Protein International venture. 

As an aftermath of LOL’s 1991 purchase of Purina Mills Inc., the Land

O’Lakes/Farmland Feeds joint venture

at St. Paul will have closed nearly 40

mills by the time consolidation is completed by the end of 2003. Bob DeGregorio, president and CEO of the feed

venture, said the move was part of the

operation’s transition toward offering

both CENEX/LOL and Purina branded feeds. In a related move, LOL also

plans to relocate its basic feed research

from Fort Dodge and Kansas City to

St. Louis.

DeGregorio said three major issues

face the feed industry in coming years:

closing plants to curb over-capacity;

adopting food safety programs for all

of the centralized mills by the end of

2003; and paying closer regulatory

attention to small, unlicenced mills to

counter attention toward larger mills

licensed to produce medicated feeds

by the Food and Drug Administration.

Meanwhile, LOL is shutting plants at

Perham and Fairbault, Minn., and

Volga, S.D., to consolidate and shift

production elsewhere in its system. 

CHS opens Brazil office;

‘02 sales at $7.5 billion 

A Brazilian-based grain marketing

office has been opened by Harvest

States, the grains and food division of

32 March/April 2003 / Rural Cooperatives

various organizational options that

would enable its member owners to still

own the cooperative, but not be obligated to supply all of the soybeans needed to operate the plant. This would give

SDSP more flexibility to purchase raw

soybean oil and refine it instead of

adding crushing capacity to obtain the

oil. The board considered different

options, including: 1) continuing to

operate as a cooperative and paying the

corporate tax on the non-patronage

sourced income; 2) not expanding into

these new investments; and 3) forming

a limited liability company (LLC).

It was decided that an LLC would

accomplish the goals of ownership by

soybean growers and enable SDSP to

have the flexibility to acquire soybean

oil. This organizational structure

would enable SDSP to pass along

income directly to its members without

paying taxes at the company level. In

contrast, a cooperative corporation

would have to pay a corporate income

tax on non-patronage income. The

LLC’s “partnership,” or single taxation

structure, would distribute income to

owners as dividends, which would then

be taxed at the member- owner level. 

The LLC structure also allows flexibility to transfer equity shares between

members and would enable it to

increase its potential investor pool if it

ever needed additional capital. 

“We think this organizational

structure is going to carry us into the

21st century and give us maximum

flexibility,” Christianson says. “We’re

still a producer-owned business and

that’s the important feature. Planning

has helped us take advantage of

opportunities over the past few years

as they presented themselves and

enabled us to remain producerowned. Now we need to focus on

markets for soy-based products such

as food, fuel and foam. “ ■

Striking Oil continued from page 21

John Dilland 
Rural Cooperatives / March/April 2003 33

CHS Cooperatives, St. Paul, Minn.

Known as Harvest States de Brasil

Ltda., the office will temporarily open

at Sao Paulo with a staff of 20 headed

by Stephano Rettore. It will originate

and export soybeans in Brazil. Harvest

States doesn’t plan to own or acquire

any elevators or terminals in Brazil.

The office was opened so the cooperative could keep pace with customers,

who have become increasingly global.

Brazil’s soybean harvest season counterbalances the U.S. harvest, and will

better enable CHS to become a fullservice grain originator for customers.

Meanwhile, CHS raised $86.2 million in a recent sale of 3.45 million

shares of 8-percent cumulative,

redeemable preferred stock. The $25

shares will pay an annual $2 dividend on

a quarterly basis. In a 2001 offering to a

narrower distribution network, 

CHS raised $9.3 million. “This is a new

step for us,” says Lani Jordan, CHS

director of communications. “We’re

taking the opportunity to explore

financing beyond our traditional base of

our farmer and ranch owners.”

Despite the weak agricultural economy, CHS paid $56 million in cash

patronage and equity redemptions for

2002. The co-op had sales of $7.5 billion,

little changed from 2001, but net income

slipped 29 percent, or $52 million, to

$126.1 million. The 1.2 billion bushels of

grain CHS handled contributed about

$5.3 billion to combined revenues. Harvest States will open two new businesses

in 2003, a soybean processing facility at

Fairmont, Minn., and a tortilla processing center at Newton, N.C. 

Golden Growers rejects change 

Following the lead of Chairman

Carl Larson Sr., members of Golden

Growers Cooperative of Fargo, N.D.,

rejected a move by some members to

cut the size of the board from 15 to 7

and voting districts from five to three.

Larson said he felt a larger, geographically based board meant better representation for the members. The 1,800-

member cooperative has a 49-percent

ownership interest in ProGold’s corn

processing plant at Whapeton that has

been leased to Cargill since 1997.

Dakota Layers Co-op 

operating in Flandreau 

The first shipment of 240,000 pullets marked the start of operations of a

$9 million egg factory operated by

Dakota Layers Cooperative near Flandreau, S.D. By this summer, more than

750,000 laying hens will call the plant

home. In full operation, more than 180

million eggs will be produced every

year and shipped to the South and

Southwest, according to a marketing

The initial capital investment

required from each member would be

based on the desired equity level, for

example, 50 percent equity and 50 percent debt. Further, equipment may be

leased rather than purchased, thus

reducing the amount of initial equity

capital required. 

Operating capital

Operating capital for fuel, repairs,

maintenance and lease payments would

be generated from fees charged to individual members for use of the equipment. An appropriate fee structure for

the use of each type of equipment

would most likely be established by the

board of directors or by the general

manager with guiding polices established by the board.

Summary

Many benefits can be derived from

a machinery cooperative, but two are

significant: 1. Reduction of individual

farmers’ machinery costs; 2. Mediating the timeliness issue related to custom operators. Smaller farmers do

not have the acreage to justify the

cost of a full line of modern farm

equipment. Sharing machinery costs

via cooperatives addresses this issue.

Relying on a custom operator for forage and grain harvesting is also a

viable alternative. 

But small farmers are not necessarily given priority by custom operators for work. Small operations,

therefore, may be at a disadvantage

in completing harvest during the ideal time window for haylage or corn

silage. A machinery cooperative

offers these smaller farmers the

opportunity to better control the

scheduling of harvesting. 

There are many factors to consider

prior to forming a successful machinery cooperative. The guidelines 

presented here outline a few of the

issues to be addressed. Ultimately,

communication is the key. It is crucial

to the success of a machinery co-op

that needs and goals be communicated

between members and their elected

board of directors. 

Machinery cooperatives provide a

very viable option for smaller dairy

farms to address the challenges of

access to modern equipment, limited

available farm labor and harvesting

risk associated with bad weather. In

addition, they provide social opportunities to share both farm and nonfarm business-related information. ■

Sources

■ Drye, Pat and Cropp, Bob.

“Machinery Cooperatives in Production Agriculture.” Unpublished paper,

UW Center for Co-ops, Madison, WI,

June, 2002. 

■ Fyksen, Jane. ‘“Shared Machinery

Old Idea, Still Good One”. Agri-View,

page D-1, July 16, 2002.

■ Harris, Andrea & Murray Fulton.

The CUMA Farm Machinery Cooperatives, Canada: Center for the

Study of Co-operatives, University of

Saskatchewan, 2000.

■ Harris, Andrea & Murray Fulton.

Farm Machinery Co-operatives in

Saskatchewan and Quebec, Canada:

Center for the Study of Co-operatives,

University of Saskatchewan, 2000.

Machinery co-ops continued from page 28
34 March/April 2003 / Rural Cooperatives

agreement with Hickman Eggs of

Glendale, Ariz. Scott Ramsdell, chairman of the board of the 120-member

cooperative, said the project had been

planned for three years. 

Co-op Communicators

mark 50th anniversary 

Returning to where it was formed 50

years ago, the Cooperative Communicators Association (CCA) will

mark the start of its golden

anniversary year with its

annual communications

institute, June 21-24 in

Madison, Wis. The international association consists

of 350 professionals who

communicate for cooperatives in the United States

and Canada. CCA works

toward helping members

excel in communication skills such as

writing, photography, editing, video, layout and design. For further institute

information, call 806-795-2783.

Farmland eyes revamp, 

sale of meat business 

Although first quarter earnings for

fiscal 2003 (ending Nov. 30) helped

keep the Kansas cooperative’s head

above water, the sale or revamping of

Farmland Industries’ meat business

may provide the final avenue out of

bankruptcy for a much smaller business. Bankruptcy Judge Jerry Venters

has allowed Farmland to hire an investment banker to explore, market and

possibly sell some or all of its beef and

pork assets. Farmland is the fifth

largest meat company in the country.

Meanwhile, Smithfield Foods wants to

buy these Farmland meat assets and is

using acquired Farmland debt to press

its point. Essentially, all the cooperative’s assets are up for sale, but some

are tied to specific deadlines connected

with post-bankruptcy credit it received.

Farmland wants to reclassify almost

$17 million in deferred compensation

and retirement adjustments owed to

138 current and former employees,

cancel life insurance policies for 2,200

retirees and renege on about $2 million

in separation fees due to four executives who agreed to leave the firm. 

Meanwhile, Farmland’s operating

earnings before reorganization expenses

in the first quarter of fiscal 2003

increased from $3.2 million in 2002 to

$16.5 million. Sales were down slightly

to $1.7 billion, from $1.8 billion the prior year. Farmland said its cash flow

topped requirements for its lending

facility. Margins were up

on fresh pork and volume

rose on processed pork.

Fall fertilizer sales showed

signs of rebounding. Borrowings since reorganization are down $70 million.

But the cooperative’s bottom line still shows a $417

million loss after recording

reorganization charges.

The sale of Farmland’s

fertilizer plants and terminals in seven

states, plus a co-owned ammonia plant

in the Republic of Trinidad and Tobago, moved a step closer with the $270

million bid by Koch Nitrogen Co. of

Wichita. The offer will be the base for

an auction set by the bankruptcy court.

Farmland anticipates closing the deal

by spring. Koch also has a one-year

option to buy Farmland fertilizer operations in Kansas and Louisiana. The

cooperative is still trying to sell its

petroleum refinery and grain elevators.

Stan Riemann, executive vice president,

said the sale was pivotal to Farmland’s

reorganization. Many Farmland locals

have already written off their share of

investment in the regional co-op.

DVM to purchase all 

Agri-Mark Lactoferrin

DVM International of the Netherlands has agreed to purchase the entire

supply of lactoferrin from Agri-Mark

Inc.’s plant in Middlebury, Vt. DVM

has an option to buy ImmuCell Corporation’s half interest in a joint venture

with Agri-Mark. First introduced in

infant formulas, activated lactoferrin

now is used on meat to increase its

safety. DVM has an existing joint venture with Farmland National Beef to

supply the product sprayed on meats.

The market for lactoferrin also is gaining for use in health supplements.

Md.-Va. Milk Producers buy

North Carolina dairy co-op

The 1,600-member Maryland and

Virginia Milk Producers Cooperative

has expanded by purchasing Maola

Milk and Ice Cream Co., at New Bern,

N.C. The firm employs more than 400

at New Bern and operates 13 distribution centers in North and South Carolina and Virginia. Maryland-Virginia

Milk Producers also employs another

400 at its processing plants, operating

as Marva Maid, at Newport News, Va.,

and Red Oak at Baxley, Ga., plus manufacturing plants at Laurel, Md., and

Strasburg, Va., and an equipment warehouse at Frederick, Md. 

Southern States motto:

180 degrees, 160 days

Business realignments and year-end

financing have pulled Southern States

Cooperative (SSC) from the brink of

bankruptcy and given it a stronger

financial base. The whole organization

is poised for a spring turnaround, SSC

leaders say. The Mid-Atlantic cooperative, based at Richmond, Va., is using

the short-term motto: “180 degrees in

160 days,” to motivate its employees in

23 states. “We can’t afford a major

miss,” said Chief Financial Officer

Leslie Newton. SSC is concentrating

its energy on its core farm supply business, Newton indicated. It reached a

$375 million financing agreement with

its lenders and gained a clean audit in

the process. Now, it wants to complete

a turnaround by June 30, the end of its

current fiscal year. 

Smith to chair AMCOT

The board of directors of AMCOT

at Bakersfield, Calif., has chosen Tom

Smith, retired president of Calcot,

Ltd., as its new chairman following the

retirement of C.L. Boggs. Boggs earlier was president of Plains Cotton

Cooperative Association (PCCA) of

Lubbock, Texas. Smith joined Calcot in

1957 and two decades later headed the

cotton marketing cooperative. 
Rural Cooperatives / March/April 2003 35
36 March/April 2003 / Rural Cooperatives

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