Rural

COOPERA COOPERATIVES

USDA / Rural Development September/October 2005

Taking Stock

Keys to success for rural grocery co-ops page 19

Taking Stock

Keys to success for rural grocery co-ops page 19

USDA / Rural Development September/October 2005
2 September/October 2005 / Rural Cooperatives

A fishing boat tossed a

quarter mile inland and

deposited on the roof of a

collapsed home. Mile

after mile, block upon block, of houses

and commercial buildings transformed

into splinters and rubble. Beautiful

coastal cities like Biloxi and rural towns

looking like they’ve been the targets of

wartime saturation bombing. The great

city of New Orleans turned into a fishbowl. Scenes so terrible that they seem

almost surreal.

At press deadline for this publication (Sept. 8), the nation is only beginning to gauge the terrible toll of

Hurricane Katrina. The death toll is

already several hundred and could go

much higher as the flood waters drop

and rescue workers begin the grim task

of sifting through the wreckage. And

with property damage expected to

exceed $100 billion, this will easily go

down as the worst natural disaster in

the nation’s history. 

The storm created a tidal wave of

homeless evacuees unlike anything our

nation has ever before experienced –

hundreds of thousands of people needing shelter, food and the other necessities of life as they await determination

of when, and if, they will ever be able

to return to their homes.

USDA Rural Development is playing

a major role in finding living quarters

for storm victims. Some 30,000 unoccupied apartments in USDA-financed

multi-family housing developments (and

nearly 200 single-family homes) across

the nation were identified within days of

the storm, and are being made available

to shelter the victims. 

Rural Development has waived security deposits and offered rent abatements for up to 90 days to help victims

and has fronted security deposits for

utilities. In the most heavily stormimpacted areas, USDA Rural Development instituted a 180-day halt on mortgage payments for more than 14,000

housing customers. 

Rural Development is also taking

the lead in coordinating available

housing from other federal agencies,

including Housing and Urban Development (HUD) and the Veteran’s

Administration. 

In disaster relief centers across the

impacted area, volunteers from USDA

Rural Development field offices are

staffing the desks to handle assistance

requests. Likewise, our rural utilities

programs staff is going all out to provide supplemental financing and technical help for repairs of electric,

telecommunications and water systems. 

Other USDA agencies are likewise

involved in more ways than can be

addressed in this column. To cite just

one, the USDA Forest Service has 11

management/logistics teams and 37

labor crews of 20 people each undertaking 30 assignments at a cost of $28

million in storm-hit communities

along the Gulf Coast. 

America’s cooperatives are also

sending aid in many forms. As they

have in so many other hurricanes in

recent years, rural electric co-ops are

sending repair crews to help get the

lights back on. Five electric crews

from Walton Electric Membership

Corporation (EMC) in Georgia were

dispatched to southwest Mississippi

just a day after the hurricane hit. A

few days later, it sent more crews to

an even harder-hit co-op, the Pearl

River Valley Electric Power

Association in Columbia, Miss. When

not working, crew members were

sleeping in a church there — the only

shelter available.

The Cooperative Development

Foundation quickly launched the

Katrina Cooperative Recovery Fund,

which will direct contributions specifically to individuals and cooperative

businesses in the rural areas of the three

hurricane-ravaged states. See Newsline

(page 35) for more on this effort. 

One good bit of news for farmer coops at press deadline is that Port of

New Orleans authorities believe shipping operations may be restored to a

semblance of normality much sooner

than had initially been anticipated.

One can almost hear an audible sigh of

relief throughout the nation’s heartland

from farmers and co-ops who depend

on the Mississippi River network and

the Port of New Orleans for shipping

their crops. 

This recovery effort will last for

years to come. Whatever it takes, there

should be no doubt that USDA Rural

Development and the nation’s cooperatives will do their part to help mend a

land, and lives, broken by nature’s fury.

— Dan Campbell, Editor

COMMENTARY

Shelter from the Storm

USDA Photos by Bob Nichols
Rural Cooperatives / September/October 2005 3

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(voice or TDD). USDA is an equal opportunity

provider and employer.

Mike Johanns, Secretary of Agriculture

Thomas C. Dorr, Under Secretary,

USDA Rural Development, 

Peter Thomas, Administrator, 

Rural Business-Cooperative Service

Roberta D. Purcell, Deputy Administrator,

USDA Rural Business-Cooperative Service

Dan Campbell, Editor

Vision Integrated Marketing/KOTA, Design

Have a cooperative-related question?

Call (202) 720-6483, or

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This publication was printed with vegetable oil-based ink.

Rural COOPERA COOPERATIVES

September/October 2005 Volume 72 Number 5

p. 4

p. 8

p. 19

p. 27

FEATURES & NEWS

4 Running on Empty?

‘Great ethanol debate’ waged at NCGA forum

By Stephen Thompson

8 Farmer-owned ethanol and the 

role of information technology

By Anthony Crooks & John Dunn

17 Diversified rural economy 

goal of Under Secretary Dorr

19 Taking Stock

Rural food co-op case studies reveal success factors

By Greg Lawless & Anne Reynolds

25 Antitrust review reveals strong 

co-op support for Capper-Volstead

By Alan Borst

27 When the sky falls

Advance planning key to crisis communications

By Amber DuMont & Donna Abernathy

DEPARTMENTS

2 COMMENTARY

14 LEGAL CORNER

15 VALUE-ADDED CORNER

29 NEWSLINE

37 NEW CO-OP PUBLICATIONS

39 INSIDE RURAL DEVELOPMENT

On the Cover:

Viroqua Food Co-op General Manager Jan Rasikas, right, in the old

store with an employee and her daughter. The co-op recently moved to

a much larger store. Story on page 19. Photo by Greg Lawless, courtesy

University of Wisconsin
4 September/October 2005 / Rural Cooperatives

By Stephen Thompson

Assistant Editor

oes making

ethanol consume more

energy than it

produces? Will

ethanol be a key component

in helping the nation reduce

its voracious appetite for foreign oil, or just be a bit player

on the energy front? 

That’s been the subject of

an intense debate for years,

and two panels of experts

squared off recently to try to

settle the question. The

experts presented starkly differing views during “Ethanol

Energy Balance,” an open

forum held Aug. 23 at the

National Press Club in

Washington, D.C., sponsored

by the National Corn

Growers Association

(NCGA).

Dr. David Pimentel, a professor emeritus of entomology at

Cornell University, and Dr. Tad W.

Patzek, an associate professor of chemical engineering at the University of

California-Berkeley, argued that

ethanol production from corn is a net

energy loser and contributes to global

warming. They also say it could never

provide more than a tiny portion of

the nation’s fuel needs. 

Dr. Bruce Dale of Michigan State

University and Dr. John Sheehan of

the National Renewable Energy Lab

countered that Pimentel and Patzek

are running on empty, and that their

conclusions are based on faulty data.

Patzek and Pimentel’s conclusions

have received some notoriety in the

media, leading some ethanol advocates

to accuse them of “duping” the public.

The resulting controversy encouraged

the NCGA to hold the forum and,

later the same day, a follow-up seminar: “Renewable Energy: Dynamic

Possibilities,” during which the

emphasis was more on the potential of

ethanol and biodiesel.

Energy consumed vs. yield 

The disagreement centers on the

amount of total energy inputs required

to produce ethanol. These inputs

include: the fuel to power machinery

needed to grow and harvest the feedstock, such as corn; the petroleum used

in manufacturing the required fertilizers, pesticides and herbicides for the

feedstock; the energy expended to

transport the feedstock to the processor, and the energy used by the ethanol

processing plant.

Pimentel has argued for many years

that the total energy inputs, when

added up, make ethanol a “net energy

loser,” and that relying on ethanol as a

fuel source would cause significant

environmental impacts. 

Running on Empty? 

‘Great ethanol debate’ waged at NCGA forum 

D

Illustration by Stephen Thompson
In a paper he published in 1998,

Energy and Dollar Costs of Ethanol

Production with Corn, he says: 

“Assuming a net production of 50

gallons of fuel per acre of corn, and

assuming that all cars in the United

States were fueled with ethanol, a

total of approximately 2 billion acres

of cropland would be required to

provide the corn feedstock. This

amount of acreage is more than five

times all the cropland that is actually

and potentially available for all crops

in the future in the United States.”

Pimentel spoke to a largely proethanol crowd of corn producers and

their representatives. Ethanol, he said,

is not a true renewable energy source,

because it requires more energy in its

production than is extracted from the

finished product. According to his calculations, ethanol takes about 1.15

BTUs (British Thermal Units) of

input for every 1 BTU of output. 

Other reasons ethanol production is

undesirable, said Pimentel, include the

environmental impact of corn production. “Corn production causes more

soil erosion than any other crop.” He

added that growing corn also requires

more insecticide, herbicide, and nitrogen fertilizer than most other crops,

with the result that corn production in

the United States causes $45 billion in

environmental and other damage each

year. He said it requires 1,725 gallons

of water to produce 1 gallon of

ethanol. 

Pimentel also claimed that, with

more than 3 billion malnourished people in the world, burning corn for

energy poses serious ethical questions.

Pimentel advocated using other fossil fuels to replace petroleum. “We can

use coal to make diesel and gasoline,”

he said, at an energy cost of 2 BTUs

to produce 1 BTU of fuel.

Patzek told the audience that simply

keeping U.S. car tires properly inflated

would save more petroleum than

ethanol production. “Each year the

U.S. uses more energy than our vegetation can sequester as biomass,”

Patzek argued. He said that in 2003,

the United States used 105 times more

energy than was required to feed the

population, and biomass as a source of

energy in the United States is heavily

subsidized by petroleum.

According to Patzek, the amount of

ethanol energy that can be extracted

from 1 square meter of land is “tiny”

— about one-tenth of 1 watt — compared with energy available from other

sources. “A wind turbine generates 1

watt per square meter, which can be

converted to mechanical work almost

perfectly,” he said. “A photovoltaic cell

generates between 10 and 20 watts per

square meter. Thus, wind turbines and

photovoltaic cells are 20 to 100 times

more efficient in delivering mechanical

work than corn ethanol.”

Patzek showed a graph comparing

projected petroleum consumption and

ethanol production in 2012. “Anhydrous ethanol replaces 1.5 percent of

petroleum in 2004,” he said, “and will

replace another 1 percent in 2012” —

far too little to make an impact on

U.S. petroleum consumption.

Ethanol advocates’ response

John Sheehan countered that

ethanol’s return on fossil energy

investment is positive. Peer-reviewed

Department of Energy and USDA

research, he said, shows that producing

1 unit of ethanol energy from corn

requires only 0.75 of an equivalent unit

of petroleum energy, for a net gain of

25 percent. Using switchgrass for

ethanol production results in even

higher energy gains: up to 72 percent. 

“Pimentel’s methodology assumes

inputs that are too high,” Sheehan said.

“No one is saying that biofuels will

replace petroleum,” said Sheehan, but

Critics say ethanol diverts too much corn

from human consumption; but proponents

note that the nation is running up record

corn surpluses . USDA/ARS Photo

Rural Cooperatives / September/October 2005 5
6 September/October 2005 / Rural Cooperatives

he added that the value of biofuels in

reducing the U.S. dependence on foreign oil is “critical.”

Bruce Dale not only disputed the

Pimentel data, he also attacked the

very premise of Pimentel’s argument:

that the net energy balance of a fuel is

a valid yardstick of its usefulness. “I

come to bury ‘net energy,’ not to

praise it,” he said, referring to the

Pimental’s cost/benefit formula. 

Dale called net energy a “convenient fiction, an academic toy” that

“doesn’t relate to the real world.” The

reason, he said, is that it doesn’t

address the quality of various forms of

energy — treating solar, natural gas,

coal, petroleum, etc., as equal. “But all

energy is not created equal,” he

declared, arguing that the quality of

energy — that is, its readiness to be

converted into the required work or

service — is a vital factor in determining its value.

“We do not need energy per se,”

said Dale. “We need the services energy provides,” including electricallypowered equipment and appliances,

heat and transportation. The U.S. has

lots of coal and natural gas,” he said,

“But they don’t work in the gas tank.

They have the wrong energy quality.”

Solutions, he said, “will require making comparisons and choices between

real alternatives.”

Dale gave an example: Using the

criterion of Pimentel and Patzek, he

said, the “net energy” of electricity

produced from coal is minus 235 percent, because it takes three calories of

coal to produce one calorie of electricity. But, “Electricity is higher quality

energy than coal.” Refining crude oil

into jet fuel, diesel or gasoline results

in a net energy balance of minus 39

percent, as opposed to minus 29 percent for making ethanol from corn,

according to Pimentel’s figures.

If ‘net energy’ was a good yardstick,

“we should shut down all coal-electricity generation and all oil refineries,”

Dale said. 

During the question-and-answer

period, Pimentel was asked about

ethanol production’s relation to animal

feed. He replied that using corn for

ethanol had resulted in higher beef

prices. Dale challenged that assertion,

asking Pimentel how he could reconcile his statement with the fact that the

United States currently has the highest

stocks of corn in history — more than

2 billion bushels of surplus corn last

year. 

Other questions centered on the

data used by the anti-ethanol faction in

making its calculations. Both Pimentel

and Patzek were accused of using outdated data from the 1980s, but

Pimentel asserted that, except for figures regarding the energy costs of the

concrete used in building ethanol

plants, his figures were up-to-date.

Biofuels touted as efficient

The “Dynamic Possibilities” forum

was devoted to supporters of ethanol

and other biofuels, many of whom

continued to criticize Pimentel and

Patzek’s findings. 

Roger Conway, a USDA researcher,

called the concept of net energy a false

standard, and claimed that Pimentel

and Patzek “picked and chose” data to

get a desired result, treating as consistent information from surveys gathered

with differing methods and criteria.

David Morris, of the Institute for

Local Self Reliance, said that biofuels

are not a silver bullet for the energy

industry, but could replace 70 percent

of the petroleum used for fuel and

other purposes. He pointed out that

the co-products of ethanol and

biodiesel were “significantly valuable,”

and said that Pimentel and Patzek did

not include the true value of such

products as distillers grains and soy

meal, both excellent animal feeds, in

their calculations. 

“We’re not dying from a shortage of

starch,” Morris said, referring to the

ingredient of corn that is used in the

fermentation of ethanol, leaving

behind high-protein distillers grains.

Even with biofuels, Morris said, the

United States must reduce its overall

energy consumption.

Morris has just published a new

paper: Carbohydrate Economy, Biofuels

and the Net Energy Debate (on-line at:

www.newrules.org) which looks at the

comparative data that underlies the

ethanol debate. In it, he says

Pimentel’s “aversion to including an

Net energy ratios of ethanol and biodiesel, as determined by different researchers. A ratio of

1 means that the same amount of energy is used to produce the fuel as is extracted from the

final product. A ratio higher than 1 means a surplus of energy. In both cases, David

Pimentel’s findings are substantially lower than those of other researchers. 

Data: David Morris/Institute for Local Self Reliance; Graphic by Stephen Thompson. 
Rural Cooperatives / September/October 2005 7

energy credit for [ethanol] coproducts

is puzzling. If we use the energy used

to grow and process a crop on the

input side of the equation, we should

include all the energy value of all the

end-products on the output side.” 

Morris also said biofuels represent

a tremendous opportunity for farmers

to add value to their crops, saying

there could be 1 million farmers owning shares in a biorefinery by 2050. 

Michael Wang, of the Argonne

National Laboratory’s Center for

Transportation Research, said that

many studies contradicted the claims

of Pimentel and Patzek. He said that

Argonne’s study of the same subject

concluded that producing corn

ethanol requires 26 percent less energy than it contains, and that cellulosic

ethanol, made from switchgrass and

other inexpensive plant sources,

requires a whopping 90 percent less,

partly because its byproducts can be

burned for energy to power the processing plant. 

“A review of Pimentel/Patzek,” said

Wang, “reveals that they made pessimistic assumptions, and doublecounted certain energy costs without

detailed elaboration.” Wang accused

Pimentel and Patzek of consistently

overestimating energy requirements

for both farming and processing of

corn for ethanol, including calculating

ethanol plant energy use at 30 percent

above actual figures.

Other speakers attacked Pimentel

for using extraneous data in their calculations, such as the food eaten by

farmers and workers engaged in

ethanol production and the energy cost

of building farm machinery, and

claimed that their results were not

peer-reviewed before publication.

For more detailed reading: 

A copy of Dr. Patzek’s presentation

to the forum is available on the

Internet at:

http://www.berkeley.edu/news/media/r

eleases/2005/08/NPC_briefing_Patzek

.pdf. Other presentations can be found

at the NCGA Web site at:

http://www.ncga.com/ethanol/debunking/ForumPresentation.htm.

David Pimentel’s 1998 report,

Energy and Dollar Costs of Ethanol

Production With Corn is available at:

http://hubbert.mines.edu/news/Piment

el_98-2.pdf. Pimentel and Patzek’s

article, Ethanol Production Using Corn,

Switchgrass and Wood; Biodiesel

Production Using Soybean and Sunflower,

was published in in the March, 2005

edition of Natural Resources Research

magazine. ■

This field of soybeans could be harvested for

biodiesel, which produces a higher yield of

energy than does ethanol. USDA/ARS Photo

“There could be 

1 million farmers

owning shares in 

a biorefinery by

2050.”

— David Morris
8 September/October 2005 / Rural Cooperatives

Anthony Crooks and John Dunn,

Agricultural Economists

USDA Rural Development 

Editor’s note: This is the first of a two-part

article looking at the impact evolving

information technology is having on the

nation’s rapidly expanding ethanol industry. In part two, we will take a closer look

at the various factors that have converged

to spark the industry’s growth, as well as

the impact of information technology on

production and commercialization of

ethanol products. 

dvanced information

technology (IT) and an

increasingly transparent

financial sector have

become key driving business forces in recent years, having

major impacts on operations, strategies,

structures, ownership and performance.

These forces cut across many industries

to force changes which, in turn, have

had significant economic and social

impacts in rural communities. 

Recent writings underscore the

depth and extent of the impact of IT on

business and industry. Consider just a

few:

• Are the impacts of IT adoption any

more profound or far reaching than

that of other technologies? In his

book, Does IT Matter? Information

Technology and the Corrosion of Competitive Advantage, Nicholas Carr

seems to think not. Carr asserts that

IT, as with earlier technologies —

railroads, electric power and telephones — is steadily evolving from a

profit-boosting, proprietary resource

into a simple utility/commodity and

another cost of doing business. Carr

contends that the strategic importance of IT has actually eroded as its

core functions have become widely

available and affordable. Carr’s views

were roundly contested. 

• In IT Doesn’t Matter, Business Processes

Do; A Critical Analysis of Nicholas

Carr’s IT article, published in the

Harvard Business Review, Howard

Smith and Peter Fingar suggest that

Carr was only half right. They say

Carr’s article is about technology as a

business (the IT industry), not the

business use of technology for competitive advantage. In other words,

Carr has intermixed information

technology as a business with the act

of using information technology to

conduct business. Carr’s article examines the first 50 years of IT and business automation, when the focus was

on data function, storage, processing,

and transport. In the next 50 years,

the core functions of IT are business

processes and their functions of storage, processing, and transport. 

• In The World is Flat: a Brief History of

the 21st Century, Thomas Friedman

takes off at a gallop, offering example

after example of just how correct

Smith and Fingar were. Friedman

asserts that it is precisely because of

IT and business process-processing

that the era of mainframe computing

— with its command-and-control

orientation and companies

and/departments organized vertically

Farmer-owned ethanol and the 

role of information technology

A
Rural Cooperatives / September/October 2005 9

— has given way to the era of PCInternet-fiber optics computing and

new business practices which are less

about command and control, and

more about connecting and collaborating horizontally. 

• In The Only Sustainable Edge: Why

Business Strategy Depends on Productive

Friction and Dynamic

Specialization, John Hagel and

John Seely Brown assert that

businesses thrive when they take

full advantage of IT opportunities

to negotiate the “productive friction” of their economic environment and begin to coordinate the

activities of enterprises, companies and specialties across dimensions of time, space and form to

build and accelerate their capabilities. Friedman and Hagel/Brown

emphasize the critical importance

of digitizing and decomposing

work so that it can be moved

around in time and space — to be

outsourced (or off-shored) for

competitive advantage. 

IT leveling the playing field

for smaller-size businesses

It is precisely because of evolving IT and business process-processing that mid-sized firms from

all over the world compete now on

a more level playing field.

Suddenly, mid-sized and even small

businesses have access to the same

advantages that were once held

exclusively by the larger, vertically

integrated firms. 

As the fuel ethanol industry ramps out

of its developmental stage into a more

established role within the U.S. fuels

industry, a substantial portion of investments are being made in single plants

with annual capacities that range from

50-100 million gallons. Not all ethanol

ventures have succeeded. However, a

substantial flow of capital investment

into ethanol plants continues, unabated. 

This emerging industry structure is

in sharp contrast with what is typically

observed in sectors that process bulk

agricultural commodities. Typically, a

commodity sector is composed of a few,

large multi-plant firms which achieve

relative prominence after attaining significant economies of scale, size and

scope. These plants then work to capture additional value through their

trading and financial operations. These

traditional industries are also characterized by a high degree of vertical integration and/or coordination. 

The ability of traditional firms to

achieve competitive advantage is predicated, in part, on their capacity to

develop efficient internal information

systems to provide market coordination and links between their operations

and global commodity and financial

markets. However, the rapid and

widespread change in information

technologies has arguably eroded the

power provided to these global processing concerns.

Objectives

Our hypothesis is that the knowledge-based economy may be fundamentally changing cost structures and

the competitive landscape faced by

firms in rural America. This became the

jumping-off point for this USDA-sponsored study on the future ownership

and control of the ethanol industry.

Several factors have contributed to lowering

ethanol plant operating costs, including greater

corn-to-ethanol conversion rates, which are now

commonly 2.8 bushels per gallon. Photo by David

Lundquist. Background photo USDA/ARS
10 September/October 2005 / Rural Cooperatives

The objective of out study was to discover answers to four basic questions:

(1) Does the present ethanol industry represent a stable structure

or a transitional step toward an

inevitable concentration of

ownership into the hands of a

few large processing firms? 

(2) Have contemporary information

technologies fundamentally

changed the information flows,

scale of operations, access to

markets, conditions of vertical

and horizontal coordination,

sources of finance and the competitive landscape for mediumsized, independent processing

firms? 

(3) To what degree have cost savings associated with better

access to information and

financing offset the cost savings

traditionally associated with

horizontal and vertical integration in processing industries? 

(4) What steps do medium-sized

ethanol production entities need

to take to continue to survive in

this new information-based

market environment? 

The fuel ethanol industry may very

well be in transition toward an

inevitable concentration of ownership

into the hands of a few large processing firms. At present, however, there

seems to be a structural equilibrium

among the mid-sized and largest

firms. This equilibrium is supported

by an industry-wide adoption of contemporary information technologies

that serves to enhance medium-sized

firms’ access to markets and inputs,

while simultaneously diminishing the

relative importance of vertical coordination. 

The rise of the ethanol

plant “franchise”

In the early 1980s, a number of

people were exploring the idea of

small, portable on-farm stills and 1-

million-gallon-per-year plants. They

discovered that besides being expensive

to build, these plants have to be staffed

24 hours a day and that the job is

much more sophisticated than throwing some corn in a vat, and then opening up a spigot the next day to fill up a

tractor with ethanol. 

Broin, Fagen/ICM and other engineering firms designed “cookie-cutter”

ethanol plants with standard designs

that can be easily built in most locations. They also provide the financing,

conduct feasibility studies and will

“hand-hold” producer-investors

through the entire process. They can

offer an entire package — from feasibility to turnkey and beyond. 

This prospect didn't exist in the

early ‘90s, when there were many

questions about the right way to build

a plant. Builders of a 30-million-gallon-per-year plant had to follow a

more traditional construction route.

This involved hiring a process firm, an

engineering firm for the design and a

construction management firm, all or

some of which may have had no prior

experience building an ethanol plant.

Uncertainty added significantly to

start-up costs and, subsequently, to

each step in the process. 

continued on page 11

Photo by David Lundquist, courtesy CHS-Land O'Lakes, Marketing Communications
Rural Cooperatives / September/October 2005 11

Ethanol plants typically forward-contract the sale of

their fuel twice each year. There is also a spot market,

but no real-time pricing exists. Daily prices from

Bloomberg, OPIS and Platt are published, but these are

reported too late to be of use to traders. Mandatory

reporting would be useful to plant managers and

boards of directors. Having accurately reported prices

would provide a basis of comparison for boards to use

in evaluating how good a job their marketing firm is

doing. Traders and ethanol plants get price quotes, but

no quantity information is available. 

Plants want to lock in their corn price and sell their

ethanol on a six-month contract in an effort to set a

“crush margin.” Longer periods are unavailable

because their buyers (refiners and blenders) won’t

commit beyond six months. This is an interesting development, given that energy traders are accustomed to

locking prices for up to 10 years in advance. 

The marketing of dried distillers grains (DDG) — a

major co-product created in ethanol production — is

also done primarily by a few firms with a few buyers.

The traders on both sides are well informed, but the

price reporting is of limited use because the product

traditionally is highly variable in quality and there are

no specified trading standards. DDG quality varies

because of corn quality, the heating/drying process

and an inconsistent blending of DDG with solubles.

Each of these factors results in a highly variable analysis of DDG. The market discounts the price of DDG for

this variability. 

Universities provide excellent information on the

feeding of DDG to beef cattle, swine and poultry. Some

research indicates that DDG has a nutritional value

equivalent of 120 to 130 percent of corn, but it sells at a

much lower price. 

However, while the potential to feed DDG is large,

the feed industry will not incorporate any ingredient

into its rations until there is ready supply in the amount

needed to serve their markets. A case in point is ConAgra considering the use of DDG products in its poultry

division. It tested numerous products and was reportedly pleased with the nutritional attributes and cost of

DDG and wanted to incorporate it into their rations.

Eventually, however, reliability was the restricting factor. The whole exercise stopped dead when ConAgra

asked the simple question, “Can you provide us 3 million tons of it?” Such a supply was not then available. 

Distributed Control Systems (DCS) benchmarking

enables plants to standardize their distillers grain products to the quality and consistency required by their

customers. DCS also gives opportunity for consolidated marketing efforts among partnering plants to have a

presence in regional and (soon) national markets

because they now have a consistently reliable product,

available in sufficient volume and offered at an attractive price relative to corn. 

Corn procurement is not as concentrated as corn

marketing. Many plants have procurement alliances

with their ethanol marketing partners. These are supply agreements and risk-management contracts that

work in concert with the marketing contract to provide a reasonable assurance to the plant of a working ‘grind margin.’ However, corn trading/procurement is more fragmented because it is not necessary

for a plant to align itself with a major grain-trading

company. 

One reason for this is that the farmer-owned plants

have delivery agreements with their producer members to source a significant portion of the required

feedstock locally. A more important reason is that

there is a trading history in corn and market transparency because of the Chicago Board of Trade and

the futures markets. There’s a local corn “basis,” and a

historically well known set of transportation differentials. So, it’s not necessary to align one’s self with a

major company to procure feedstock efficiently. However, lenders offer incentives to new plants to contract

for risk management services as a way of mitigating

their own risk in the project. ■

By Anthony Crooks & John Dunn

Ethanol marketing/contracting
12 September/October 2005 / Rural Cooperatives

However, enough plants have been

built to develop a large body of knowledge and experience which has reduced

the degree of uncertainty about such

projects. Time and expense have been

reduced for everything — from the

first planning meeting to pouring the

first gallon of ethanol. 

The standardized designs and business models were pioneered mainly by

Broin, Fagen/ICM and a few other

companies. These firms began with the

recognition that producer groups were

developing an investment interest in

these plants. They also understood the

operating point at which these plants

could be profitable — at that time, it

was around 40 million gallons per year. 

Compared with 10 or 15 years ago,

standard design technology has cut in

half the costs of construction and the

non-energy portion of operations. And

while it’s unfortunate that higher natural gas costs have wiped out much of that

savings, today’s plants are being built

for half the money and operate twice as

efficiently as those of the 1990s.

Several factors have contributed significantly to lowering operating costs,

including greater corn-to-ethanol conversion rates, which are now commonly

2.85 bushels per gallon, up to three

gallons (on a denatured basis) given the

right variety of corn. Reduced cost and

increased efficiency of enzymes mean

that enzymes cost only half of what

they did 10 years ago. 

Distributed control systems 

Prior to the mid-1980s, process

automation was comprised of analog

loop controls and complex pneumatic

controls with individual, large circuit

boards dedicated to each control loop.

These systems were normally located

in control rooms, so the sensors and

controller outputs had to be physically

connected to the control room. 

This resulted in large cable runs full

of wires and tubing. Because the systems were bulky and required direct

interconnections with the process,

there were often several satellite control rooms for each part (or subpart) of

the process. These systems required

sophisticated maintenance by skilled

instrument technicians, and data-logging was done on strip chart recorders.

Despite the awkward implementation,

these systems replaced hardwired relays

and manual controls for critical systems, allowing plants to reduce labor

and improve consistency of operation.

But an even more significant contributor to plant efficiency has been

the development of information technology systems, the so-called

Distributed Control Systems (DCS),

and the electronic automation that's

evolved in the plant. DCS were introduced in the late 1980s, enabling centralized process monitoring and control. DCS systems placed integrated

circuit board controllers close to the

processes that they controlled. Inputs

from field instruments and outputs to

valves and pumps were converted to 4-

20 milliamp signals to minimize signal

loss and noise.

They generally run short distances

to cabinets in the process area which

contained a manageable number of

control loops. Each DCS cabinet is

connected to a main control computer.

Process instruments, output to pumps

and valves, and controller settings are

driven from a computer console (dashboard) located in a central control

room. This design also enables monitoring and control from multiple (and

redundant) locations, such as local

control rooms, engineering offices or

even remote locations. 

Expanding system capabilities

During the 1990s, these systems

grew in capabilities in step with the

geometric growth of information technology applications and abilities. This

evolution reduced labor requirements

by more than 50 percent during the

past 15 years. As computer control,

process monitoring and laboratory

capabilities further improved, sophisticated data warehousing and analysis

systems were adopted to convert the

ever-increasing volume of data into

useful information. These systems can

now monitor process conditions and

control settings, as well as laboratory

measurements when integrated with a

LIMS (Laboratory Information

Management System). 

Whereas early systems could only

retrieve historical information, today’s

systems perform complex mathematical manipulations, display graphical

results and project future outcomes all

in ‘real-time.’ Data manipulation and

extraction capabilities enable much

narrower process tolerances to further

reduce costs and simultaneously

increase yields and productivity. 

The advantages of DCS systems,

data warehousing and analysis include:

A reduction in manpower by allowing

one operator to monitor and control

several processes at once; the ability to

see small changes in production variables and correlate them to changes in

conditions, raw materials or ingredients; and an increase in overall plant

efficiency, because operators can finetune process parameters using realtime data and sophisticated analysis.

Early on, plants scheduled several

maintenance shutdowns during the

year to prevent equipment failures.

With the data collection capabilities

of the DCS systems, preventive maintenance programs came into a world

of their own, reducing downtime for

preventive maintenance. These

processes and technologies continue

Farmer-owned ethanol and the role of information technology continued from page 11

Today’s plants are

being built for half

the money and operate twice as efficiently

as those of the 1990s.
Rural Cooperatives / September/October 2005 13

to evolve and become even more significant.

Business/bio process

metrics & benchmarking

DCS plants all have the same production and business processes and

share a data collection and analysis

protocol called "benchmarking.”

Benchmarking is an array of performance measures that are monitored

daily, gathered weekly and summarized

monthly to be reported to management and the board. If, for example, a

group of 10 plants of common design

are all linked together, the business

and biological process benchmarks for

this group are very well understood. 

The manager of any one plant,

therefore, can adjust and refine the

process to improve his performance

and thereby raise the standard of the

whole group, in a stair-step fashion.

This business process is possible only

with today’s information technology,

and even now it’s time-intensive to

perform. But this would have been virtually impossible 10 years ago.

Firms like Broin and Fagen/ICM

were able to expand to their present

capacity level because of the information technology employed by the new

plants. Broin and Fagen/ICM each

direct the operations of some 20 plants.

The talent pool to manage and

operate these plants has grown with

the process. Both firms employ a cadre

of well-seasoned managers who

learned during the difficult years how

to run a plant efficiently. Both companies provide management services,

marketing and procurement contracts

to mid-sized plants. This is a far cry

from the old days when managers were

still putting contracts out and doing

everything by hand.

Now — by using information technology and business process technology — a group has the ability to manage

about 20 plants as one plant. Fifteen

years ago, it would have been nearly

impossible to market the product for

that many plants and do a good job.

Now, an entire array of management

services is provided.

There is no way those plants could

be managed in this way without

improved information technology. The

plants themselves are physically too far

apart. It would be impossible to oversee

so many variables in different parts of

the country. The necessary staffing

wouldn’t be available because of the

expertise required at the control points.

Consolidated marketing partnerships

The rise of marketing firms was

instrumental in this trend. Ethanol is

not marketed at the processing plant.

Buyers (the refiners and blenders of

gasoline) don’t want to deal with all

these small plants. They demand bulk

purchasing — millions of gallons at a

time. Buyers want to sign contracts for

50-180 million gallons and want to

trade with someone marketing 500

million gallons per year.

The first impact of modern IT on

the ethanol industry was as a horizontal coordinator. Many mid-sized firms

consolidated their marketing activities

out of necessity to bargain with the

handful of fuel ethanol buyers who

traded in quantities of hundreds of

millions of gallons at a time. 

Successful consolidated marketing

efforts led to innovative applications of

these powerful new IT technologies to

coordinate other activities horizontally

— such as procurement and logistics,

risk analysis and eventually plant management — among several plants

simultaneously. This horizontal coordination/consolidation role across

enterprises, companies and time/space

is now performed by five or six firms.

Their services are contracted to a substantial majority of the mid-sized,

farmer-owned plants. 

Over the past few years, the market

share of the industry’s major producer

(ADM) has dropped from 60 percent

to around 30 percent. The balance has

been taken by marketing firms —

United Bio Energy, Ethanol Products

and a few others. 

Because fuel ethanol is sold by a

dozen marketers and most of it is purchased by a half dozen buyers, information on prices and quantities may be

very good within that trading circle, but

it is unavailable to outsiders. There is no

mandatory reporting of ethanol prices. 

Consolidation of 

process management 

It appears that a virtual consolidation of ethanol processing is taking

place. Instead of consolidation through

ownership, management is becoming

more centralized and concentrated. A

number of companies — such as Land

O'Lakes and Purina, CFC, United Bio

Energy and even integrators such as

Cargill — are offering management

services to facilities other than their

own. IT has altered the ethanol

industry structure by shifting the

ownership and control emphasis

from the acquisition of physical

production assets to the aggregation of information technology

assets. Economic power in the

industry no longer arises from

ownership of production capital

(plants and equipment) but from

the control and manipulation of

intellectual capital and property

rights. ■

This study is based on two focus

panels of leading ethanol producers

and industry experts, held in March

2005, to examine the state and future

of the ethanol industry. Industry

experts on the panels included representatives from: the commodities

exchanges (NYMEX, CBOT), financial

firms, producer associations and

legal firms that serve the industry,

information technology, plant management and an agricultural biotechnology firm. Follow-up interviews

among 12 plant managers were also

conducted to clarify the information

obtained in the focus panels. ■

Study methods
14 September/October 2005 / Rural Cooperatives

By Marlis Carson

General Counsel and 

Vice President, Legal, 

Tax & Accounting;

National Council of Farmer Co-ops

mcarson@ncfc.org

Donald A. Frederick

Program Leader for Law, 

Policy & Governance;

USDA Rural Development/

Cooperative Programs

donald.frederick@usda.gov

Editor’s note: This article does not represent official policy of USDA, the Internal

Revenue Service, the U.S. Department 

of the Treasury or any other government

agency. It is presented only to provide

information to persons interested in the tax

treatment of cooperatives.

n Aug. 8, 2005, President

George W. Bush signed

into law the Energy Tax

Incentives Act (Energy

Act) of 2005. The new

law provides $14.5 billion in tax reductions over a 10-year period to boost

conservation efforts, increase domestic

energy production and expand the use

of alternative energy sources, such as

ethanol, biodiesel, solar, wind,

hydropower and clean coal technology.

Several provisions will benefit farmers,

other rural residents and their cooperatives. These new tax incentives are in

addition to several favorable sections in

the American Jobs Creation Act of

2004 (Jobs Act) (see Legal Corner,

Rural Cooperatives, Jan/Feb 2005, p. 20).

These rules are often somewhat

complex. But, if understood and used

effectively, they can provide significant

tax savings to producer owners and

their cooperatives involved in energy

production.

Small ethanol producer 

credit extended

For several years, the tax code has

provided small ethanol producers a tax

credit of 10 cents per gallon on the

first 15 million gallons of ethanol produced each year. A small ethanol producer had been defined as a person or

entity whose ethanol production

capacity did not exceed 30 million gallons per year. The Energy Act extends

the credit to ethanol producers with a

production capacity of 60 million gallons of ethanol per year.

The Jobs Act gave cooperatives that

qualified for this credit the option to

pass the credit through to their

patrons, on a patronage basis. The

Energy Act requires cooperatives that

do pass the credit through to notify

their patrons in writing of the passthrough within the 8.5-month payment period described in tax code section 1382(d).

Small agri-biodiesel producer

credit and pass-through

The Energy Act creates a new small

agri-biodiesel producer credit that mirrors the small ethanol producer credit.

The credit is 10 cents per gallon on up

to 15 million gallons of bio-diesel produced each year and a “small” producer is defined as one whose biodiesel

production capacity does not exceed 60

million gallons per year. Cooperatives

may pass the credit through to their

patrons on a patronage basis, provided

a written notice of the pass-through is

mailed to the patrons within the 8.5-

month payment period.

This credit is in addition to credits

created in the Jobs Act for biodiesel

used as fuel either in a mixture with

diesel fuel or on its own. That credit is

$1 per gallon for any biodiesel that is

agri-biodiesel and 50 cents per gallon

for other biodiesel. Agri-biodiesel is

biodiesel derived solely from virgin oils

from crops such as corn, soybeans and

sunflower seeds, and from animal fats.

Renewable energy 

credit, pass-through

In 1992, Congress created a tax

credit for the production of electricity

from wind, organic material of plants

grown exclusively for use in producing

electricity and poultry waste. The Jobs

Act and the Energy Act have expanded

the list of qualified renewable fuels to

include all livestock waste, forest products, other crop by-products and

residues, geothermal energy, solar

energy, small irrigation power, municipal solid waste, refined coal and Indian

coal.

Eligible cooperatives may pass the

credit through to their patrons, on a

patronage basis, provided a written

notice of the pass-through is mailed to

the patrons within the 8.5-month payment period. An “eligible cooperative”

means a cooperative that is more than

LEGAL CORNER

Energy Tax Incentives Act

includes cooperative provisions

continued on page 34

O
Rural Cooperatives / September/October 2005 15

Type of business: Farmers Pride

Cooperative is a 100 percent, producer-owned soybean meal production

and marketing cooperative. On Sept. 

1, Farmers Co-op Oil Co. in Newman

Grove merged with Farmers Pride,

Battle Creek Co-op. 

Business objective: To operate as a

producer-owned, value-added enterprise that processes locally grown soybeans into soybean meal for local livestock producers and soybean oil for

feed or fuel.

Annual sales: Farmers Co-op Oil had

$18.8 million in total co-op sales for

2004, up 29.6 percent from $14.5 million in 2003. NewMaSoyTM soybean

meal and oil sales were $1.4 million for

2004, up 353 percent from 2003. Total

NewMaSoyTM sales for 2003 were

$415,000, which was the start-up year,

with meal being processed for less than

six months. Sales have increased exponentially since then, and will surpass

$2 million this year for processed soybean meal and oil.

Number of members & employees:

Membership comprised of 310

Newman Grove-area farmers; the

Newman Grove co-op location has 18

full-time employees overall, and several more in the soybean-processing

division. 

Description of business activity:

The conversion of soybeans into meal

and oil begins by mechanically extruding the soybeans to release the oil from

the meal. These products are then

separated; the meal is ground to a uniform consistency for additional protein

and energy in livestock feed for swine,

poultry and dairy operations. The oil is

sold as feed or fuel-grade oil to processors. While these processes have been

in existence for years, many farmers in

rural areas have been unable to reap

the benefits because the value-added

activity takes place after the commodities are sold at low market prices. 

How co-op was developed/financed:

Farmers Co-op Oil Co. was first organized in 1924 as a fuel purchasing and

distributing co-op. In succeeding years,

grain merchandising, agronomy/fertilizer, feed sales and ready-mix concrete

departments were added. In early

2002, an informal feasibility study on

adding a soybean processing facility

was done through the local board of

directors with advisory assistance from

CoBank. There was no stock sale to

finance the soybean processing plant.

The plant costs (in excess of $400,000)

were amortized over seven years at 5

percent interest. 

How USDA helped: In addition to

technical assistance, USDA Rural

Development provided Farmers Co-op

Oil Co. with a $22,300 Value-Added

Producer Grant (VAPG) for product

V ALUE-ADDED CORNER

Farmers Pride Cooperative

Newman Grove Branch, Nebraska

“This soybean-processing facility allows

members to actively

participate in, and

own, a value-added

enterprise, which

diversifies their

incomes and

improves the longterm sustainability.”
market development in 2003.

The money was used to complete a feasibility study that

would verify the existence of an

emerging market for natural

processed soybean meal and oil

products. The project received

the green light and later that

year the co-op received a second VAPG of $120,000 from

USDA Rural Development to

assist in the first full year of

operations. Farmers Co-op Oil

provided matching funds of

$142,300. 

Leader’s comment: “This soybean-processing facility allows

rural Nebraskans who are

members of Farmers Co-op

Oil Co. to actively participate

in, and own, a value-added

enterprise, which diversifies

their incomes and ultimately

improves the long-term sustainability of their farming

operations.” — Randy Benson,

General Manager, Farmers

Co-op Oil Co.

The results: Today,

NewMaSoyTM* Extruded/Expelled

Soybean Meal, Extruded Full Fat

Soybean Meal and Natural Process

Soybean Oil are being produced from

the 1,200-1,500 bushels of soybeans

processed daily. (NewMaSoy is a state

of Nebraska registered trademark.)

Three full-time positions and several

part time positions have been added

to the plant’s workforce. Through the

hiring of a full-time marketing representative, made possible by the VAPG

from USDA, sales increased dramatically in 2004. The soybean valueadded activity is anticipated to provide a 20-cents-per-bushel increase

above the raw product value.

Market outlook: The demand for

soybean oil is excellent, with the

product being sold as quickly as it is processed. Soybean

meal requires more marketing effort, but sales continue to

climb each month and the trend is strong for repeat-customer business. More than 480 tons of meal were sold in

October and approximately 1,000

tons were contracted for in late

2004 and the first half of 2005.

Protein is being provided to dairy

and swine farms, and several feed

mills. The sales area has expanded to cover 13 counties in

Nebraska with contracts in

Kansas, Colorado, South Dakota,

New Mexico and Idaho. Soybean

meal has not been sold out of

state yet, but this is the next marketing step for the co-op, with

sales in both Kansas and South

Dakota on the horizon.

Major challenge/opportunity

facing co-op: Margin percentage, production efficiency and

equipment maintenance continue

as our greatest profit challenge.

Contacts: Phone: (402) 447-6292: e-mail: grwisse@

megavision.com. ■

16 September/October 2005 / Rural Cooperatives

Randy Benson, Newman Grove branch manager (left),

and Gene Wissenburg, NewMaSoy manager, outside

their co-op’s new soybean extruding plant. Above, a

large bin was added in 2004 to the NewMaSoy Soybean Meal loading facility to handle increased production, which tripled in the second year of operation.

Photos courtesy Farmers Pride Cooperative 
Rural Cooperatives / September/October 2005 17

homas C. Dorr — a

farmer from Marcus,

Iowa — was appointed

by President George W.

Bush to be the under

secretary for rural development and

was sworn into office by Agriculture

Secretary Mike Johanns on July 27.

Dorr served in the same position

under a recess appointment from

August 2002 to December

2003. After his recess

appointment ended, he

was named senior advisor

to the secretary of agriculture for rural development

issues.

“Tom has demonstrated his insight into the

issues facing rural America

and commitment to

addressing those issues

throughout his 4 years at

USDA,” Secretary Johanns

said. “He is a tireless advocate for rural America and

I’m very pleased that the

Senate recognized his hard

work and dedication, as

reflected in his confirmation.

Johanns said Dorr’s

leadership has been

“instrumental in many of

USDA’s efforts to carry out the

President’s vision of a vibrant rural

America. I’m confident that Tom

returns to the under secretary position

with even greater passion and a

renewed sense of commitment to that

vision.”

Dorr will oversee USDA Rural

Development policies and programs.

Rural Development consists of three

program areas: rural business & cooperatives, utilities and housing. These

program areas provide $14 billion in

annual funding authority for loans,

grants and technical assistance to rural

residents, communities and businesses.

Dorr also oversees an $87 billion portfolio of existing business/co-op, housing and infrastructure loans to rural

America. Rural Development also

includes USDA’s cooperative program,

which includes research, technical

assistance, education (including this

publication) and statistics designed to

strengthen the nation’s rural cooperatives. 

Rural Development has over 7,000

employees located across the United

States and in Puerto Rico, the Virgin

Islands and the Western Pacific Trust

territories.

“I look forward to advancing the

President’s rural initiatives and positioning rural America to benefit from

the changes that are barreling down

the pike at us,” Dorr said. “There are

challenges due to ever-tougher international competition and unrelenting

cost pressures on individual producers.

But there is also enormous upside

potential from diversification of the

rural economy. Emerging growth sectors based on broadband, bio-agriculture, value-added production, ethanol

and biodiesel are there to be leveraged.

They create significant opportunity for

all rural Americans.” 

Diversified, strong rural economy

goal of Under Secretary Dorr

T

Thomas Dorr, left, of Marcus, Iowa, is congratulated by Agriculture Secretary Mike Johanns after being sworn

in as the new under secretary for rural development. With Dorr is his wife, Ann. USDA Photo by Alice Welch
18 September/October 2005 / Rural Cooperatives

As senior advisor to the secretary of

agriculture for rural development

issues, Dorr coordinated several major

initiatives on behalf of the secretary.

He played critical roles in USDA disaster relief efforts in response to the

hurricanes in Florida; he worked closely with the assistant secretary for civil

rights to reach out to minority farmers

and provided key leadership on various

activities to improve program management and business practices throughout USDA.

Dorr has broad agricultural, financial and business experience. He has

served as a member of the board of

directors of the 7th District Federal

Reserve Bank of Chicago, the Iowa

Board of Regents from 1991–1997,

and as a member and officer of the

Iowa and National Corn Growers

Associations.

Prior to his current service at

USDA, Dorr was the president of a

family agribusiness company consisting

of a corn and soybean farm, a statelicensed commercial grain elevator and

warehouse and two limited liability

companies.

Dorr graduated from Morningside

College with a B.S. degree in business

administration. He is married to Ann

Dorr and has two children. ■

USDA Rural Development moved quickly and decisively to offer many types of assistance to those affected by Hurricane Katrina. 

“In Mississippi, for example, Rural Development volunteers are driving FEMA staff to the places where

they’re needed, and working closely with FEMA,” Agriculture Under Secretary for Rural Development

Thomas Dorr said on Sept. 5, during a trip to Missouri,

where he met hurricane victims evacuated from

Louisiana and Mississippi.

“Our state offices are identifying vacant housing

units for the newly homeless. In Oklahoma, our staff is

assisting anyone from the hurricane zone who needs

help finding shelter,” he continued. “We’re working to

get generators to the affected area. As far away as

South Dakota, our agency is finding shelter for hundreds of people who are without homes. 

“The 7,000 members of our team are doing everything they can to help those in need,” said Dorr. An

assessment of Rural Development housing identified

nearly 800 vacant housing units near the hurricaneaffected area, and more than 30,000 units nationwide. 

Assistance is also being offered to homeowners

financed through Rural Development loans. Homeowners in the affected area are getting a 6-month moratorium on their mortgage payments. 

Rural Development has also designated a toll-free

number to provide assistance to homeowners, renters

and others in need of housing assistance: 1-800-414-

1226. Information is also available on the USDA web

site: http://www.usda.gov.

Renters, individuals or families made homeless by

the disaster may apply for occupancy at any other

apartment complex as a “displaced tenant.” Applicants will be placed on a special list to be offered any

vacant unit, or the next one available if no vacancies

currently exist.

For residents receiving rental assistance (RA) in

units made uninhabitable by Hurricane Katrina, Rural

Development can allow the transfer of the RA to another eligible apartment complex. The transfer must be

agreed to by all parties and be designed for the return

of the residents — if they so choose — and the RA to

the original complex and unit after the property has

been restored.

Dorr noted that assistance is also being offered to

those communities in the affected areas that have

Community Facilities loans, and if asked, the Business

and Industry Program will place a moratorium on Intermediary Re-lending Program payments. 

Additionally, Dorr said an estimated 50 Rural Development “circuit riders,” who maintain and repair small

sewer and water systems across the country, were dispatched to the disaster area to provide technical assistance to operators of sewer and water systems. ■

USDA Rural Development offers hurricane-relief 

Under Secretary for Rural Development Thomas Dorr

addresses a press conference at a Red Cross center in

Cape Girardeau, Mo., where many hurricane victims were

evacuated following the storm. Dorr is leading USDA efforts

to find housing for evacuees. Photo by Fred Lynch, courtesy

Southeast Missourian 
Rural Cooperatives / September/October 2005 19

By Greg Lawless & Anne Reynolds,

University of Wisconsin

Editor’s note: This article is excerpted from the authors’ new

report: Keys to Successful Start-Ups for Rural Food Coops: Four Case Studies, CIR 63, produced by the University

of Wisconsin Center for Cooperatives. Hard copies of the report

can be ordered by e-mail: dan.campbell@wdc.usda.gov, or by

calling: (202) 720-8381. It can also be downloaded from the

Internet at: www.rurdev.usda.gov/rbs/pub/newpub.htm. 

The report was prepared for the North Country Cooperative

Development Fund, with funding from USDA Rural

Development. 

hat factors contribute to the success or failure of a rural grocery cooperative? To find

some answers, four case studies were conducted of Upper Midwest co-ops: Iron River

Cooperatives, Iron River, Wis.; Root River

Market Cooperative, Houston, Minn.; Viroqua Food

Cooperative, Viroqua, Wis., and Tower Foods Market

Cooperative, Oneida Nation, Wis.

This article begins with brief overviews of the four coops, followed by analysis of key factors that influenced the

success or — in one case — failure of these co-ops. 

Root River Market Cooperative — Houston, Minn. 

The Root River Co-op is a full-service retail grocery store

that provides a conventional inventory of foods and other

grocery items in a city of 1,020, located in the southeastern

corner of Minnesota. The community suffered the loss of its

only grocery store in 1998. 

After failing to attract a private company to run a store, a

core of people in the community in early 1999 decided to try

a cooperative. A study showed it would cost $400,000 to

launch a co-op store. Some 310 members joined, who contributed $170,000 in member equity and loans. North

Country Cooperative Development Fund (NCDF) then

originated a loan for $225,000. About $12,500 in grants were

also raised. 

The store generated $1.06 million in the first year, about

12 percent below the projection. Operational costs had also

been underestimated. To reduce costs, one of three department managers was reluctantly laid off. 

Sales have been evenly split among members and nonmembers. Summer has been the heaviest sales period, driven

by tourism to the area. In recent years, the co-op’s gross

sales have held steady at just over $1 million. A pharmacy

(which rents space from the co-op) has drawn customers,

particularly elderly residents. The gross margin held steady

at about 25 percent during the first 5 years of operation, and

it earned a 5.9 percent net profit, annualized over the past 3

years 

At the end of November 2004, membership had risen to

419. Based on an average of 2.58 people per household, coop membership is estimated to be 1,081 individuals. 

W

Taking Stock

Rural food cooperative case studies 

reveal critical retail success factors

An original 1914 share of stock in Iron River Cooperatives, formed

by Finnish immigrants in Wisconsin. 

Root River Cooperative General Manager Tony Densted emphasizes friendly customer service. The co-op averages just over $1

million in annual sales. Photo by Greg Lawless, courtesy University of

Wisconsin
20 September/October 2005 / Rural Cooperatives

Viroqua Food Cooperative

— Viroqua, Wis.

Located in a town of

4,335 which has become a

hub of the “alternative,

back-to-the-land community.” As a natural food store,

it faces different circumstances than most conventional grocery stores. It serves as an excellent

example of the “start small and grow”

approach to food co-op development. 

It started as a food-buying club in

1991. Members decided to open a

retail outlet in Viroqua, incorporating

as a Chapter 185 Wisconsin cooperative. While the new board did not have

written a business plan or use professional consultants, it had 5 years’ experience operating a buying club of 40 core

families. The co-op’s

incorporation papers

established two classes

of stock. 

When the doors

opened in September

1995, the store had 600

square feet of retail

space and the co-op

had 95 members. In

1996, the co-op had

$174,330 in gross sales.

By 2003, the co-op’s

gross sales had risen to

$1.07 million.

The co-op did not

take out any commercial or institutional

loans to capitalize

start-up. About a year

or two after opening, it

approached NCDF for

the first of three small loans to finance

equipment and other needs. 

The co-op currently has 1,000

members representing 635 households,

with 82.5 percent of sales going to

members. Extremely limited retail

space means employees must be constantly stocking shelves. 

In 2002, a feasibility study looked at

moving to a new, larger location and

renovating an existing building.

Members invested $159,000 for the

project. However, the co-op board

ultimately decided to build a new store

at a cost of $1.6 million. It authorized

the sale of $900,000 of new, Class C

stock, which, unlike its voting stock or

Class A shares, would pay dividends.

However, unlike loans with a fixed

maturity date, the co-op won’t have to

return the new equity until people

request it.

By the end of 2004, the co-op was

negotiating a substantial loan with a

local commercial lender, using a

USDA Rural Development loan guarantee, combined with a subordinate

loan from NCDF. The co-op opened a

new store in June 2005. The new

building is 7,200 square feet, with

4,400 square feet of retail space. In the

first two months of operation, sales

were running ahead of projections. 

Tower Foods Market Cooperative —

Oneida Nation, Wis. 

This co-op had the

misfortune of representing the only “failure” among the four

case studies. The store

was located about 5

miles from Green Bay,

Wis., a metropolitan

area of 226,778 people.

Motivation to start a

co-op goes back to

April 1995, when a

non-Native family

closed its private grocery in the area. 

The idea for a new

grocery in the Oneida

Nation became a vehicle for achieving a

number of greater tribal goals: economic development and job creation,

tribal self-sufficiency, improved diets

and better health, food security for

elders and young children, and even

environmental stewardship (the store

used solar power). 

In January 1996, the tribe commissioned a study — the first of two market analyses conducted by major

wholesale suppliers. Based on a

Inside the old Viroqua Food

Cooperative (above) and the

new store (right), which

opened in June. This co-op

serves as an example of the

“start small and grow”

approach. Photo by Greg

Lawless, courtesy

University of Wisconsin
Rural Cooperatives / September/October 2005 21

10,000-square-foot facility, the first

study projected a 19-percent market

share and gross sales of almost $3.3

million in the first year of operation. 

A second market analysis later reduced

sales projections to $1.7 million. Both

proved wildly optimistic. 

The Oneida Nation

agreed to provide $250,000

to the grocery store, and an

application was also submitted to USDA requesting a

$500,000 grant. The co-op

ultimately got a $460,000

USDA revolving loan,

issued through the tribe.

Some projections were

apparently erroneously

based on that money being

a grant — a misinterpretation that

severely affected the co-op’s financial

projections. No commercial bank loans

were taken out to finance the opening

of the store. 

Project leaders spent 2001 developing a business plan, recruiting board

members, incorporating the co-op,

developing bylaws and holding community meetings. By April 2002,

extensive renovations were finally

underway to convert an empty warehouse in a business park into a modern, full-service grocery. 

Tower Foods Market opened for

business in July 2002. The store occupied 8,000 square feet and had 266

members when the doors opened.

Around the time of opening, a whole

new slate of directors took over the

board. Money set aside for board

training was not spent. 

In its first year of operation in

2002/2003, the grocery achieved only

$452,589 in gross sales, one-third of

the projection. Another sign of trouble

was the turnover in management; the

co-op went through four managers in

2 years. Poor location, outside competition and non-competitive prices were

among other factors cited in the failure

to generate more sales. 

In June 2004, unable

to attract further support

from grants, the tribe or

local banks, Tower Foods

Market shut down. 

Iron River Cooperatives

Inc. — Iron River, Wis. 

As they struggled to

clear ground and grow

crops in the hard clay

soil north of Iron River

in the early 1900s,

Finnish immigrants

would trade their farm produce with

local merchants for farm supplies and

household goods. Unsatisfied with the

available retail service, in 1914 they

organized the Oulu Co-op grocery and

set out to raise $2,500 to open it. The

sale of $10,000 of co-op stock was

authorized, at $5 per share. 

Merchants responded by cutting off

all credit to the farmers and stopped

trading groceries for their butter and

eggs. After six months, the co-op had

raised only $640, but nevertheless

decided to open for business in nearby

Iron River. In 1916, they opened a second branch in Oulu. 

Other Finns in northern Minnesota,

Wisconsin and Michigan’s Upper

Peninsula — many of them living and

working in company-owned mining

towns and remote farming communities — were also forced to deal with

stores that held a virtual monopoly

over trade and charged excessive

prices. This led to the formation of

about 65 Finnish-sponsored co-ops in

the three states, very few of which

failed during this period. 

Success was credited primarily to

the solidarity of the members and the

key role played by a federated co-op

wholesaler, the Central Co-op

Exchange (CCE), formed by Finns in

1917. CCE not only made bulk purchases for member stores, it also

An undated photo of a neighboring Finnish co-op in Maple, Wisc., 16 miles west of Iron

River. Photo courtesy Wisconsin Historical Society 

Top: The Red Star Chorus youth group, from a 1929 issue of the Central Co-op Exchange’s

(CCE) publication Cooperative Pyramid Builder. In the 1930s, CCE and affiliated co-ops 

severed relations with the Socialist party.
22 September/October 2005 / Rural Cooperatives

helped with co-op education and technical assistance for such crucial functions as bookkeeping.

Many of the Finnish immigrants

were socialists, due in part to the

tyranny they had faced under the

Russian Czarist regime. Their co-op

stores were even called ‘Red Stores’ by

non-Finns. But a struggle in the 1930s

resulted in a break with the Socialist

party. CCE changed its name to

Central Co-op Wholesale (CCW), and

replaced its red-star trade label with

the twin pines logo of the Rochdale

consumer co-ops. 

Big economic and social changes

after World War II led to the rise of

supermarkets and greater auto travel.

About 30 of the Finnish co-op stores

failed between 1945-1963. CCW

merged with Midland Co-op Inc. in

1963. By the mid-1970s, only about

one-third of the 175 Finnish co-op

stores still existed. 

Midland merged with Land O’

Lakes in 1982. By 2004, Iron River

Co-op was one of the few Finnish-origin co-op groceries still operating in

Wisconsin. Today, it operates a 7,000-

square-foot grocery and a 6,400-

square-foot hardware store. 

In fiscal 2003, the grocery and hardware stores had gross sales of $3.88

million and gross margins (after costof-goods-sold) of 26 percent and 39

percent, respectively. About 86 percent

of grocery sales were made to members in 2003. The net margin (or profit) for the combined business was

$88,082 in 2003. Current membership

stands at roughly 4,000 households,

about 3,500 of which are active. 

The co-op has been negotiating

with a local commercial bank to obtain

financing to build a new, 15,000-

square-foot building — a $2.5 million

project. Thus far, the co-op has not

pursued selling equity shares to members, nor does it intend to ask members to make unsecured loans — two

strategies that other co-ops have used

successfully to finance expansions. 

By early September 2005, the

financing for the new store was in

place (with help from Bayfield Electric

Co-op to cover a “gap”), and the board

was slated to meet later that month to

make a final decision on the move. “It’s

gut check time: when you put all the

final numbers together, does it still

work?” General Manager Patrick

Dooley said. Despite fully owning an

empty parcel of land on the edge of

town, the new plan calls for building

the new store closer to downtown. 

Critical success factors 

• Common variables that impact the

success or failure of these food co-ops

were identified in this study:

community and industry support;

member support; quality of the

business plan; business growth

patterns; market niche; board and

management leadership, and finance. 

Competition

Three of the four cooperatives faced

direct competition from grocery stores

in nearby, larger communities. In each

case, many members of the local community commute to work in these

cities and often buy groceries on the

way home. Root River Cooperative is

the only grocery store in Houston, but

there are two full-service grocery

stores in nearby small communities,

plus a Wal-Mart Superstore in La

Crosse and other large groceries in

both La Crosse and Winona.

Iron River Cooperatives is the only

full-service grocery store within a 30-

mile radius, but the co-op is concerned

about a planned WalMart Superstore

in Ashland. Tower Foods Market Coop faced the closest competition, with

four dominant grocery stores in nearby

Green Bay and a new, 68,000-squarefoot store in DePere, Wis. (five miles

away). 

Viroqua Food Cooperative differs

because it is a natural foods grocery

store, with the closest competition

more than 30 miles away. Viroqua is

four times larger than Iron River or

Houston, and it is more isolated from

large population centers. 

Support from other

co-ops & community 

All of the cooperatives received support from their cooperative community in the form of advisors or consultants. Two of the co-ops, Root River

and Viroqua, benefited directly from

the presence of strong cooperatives in

their community. The two largest

employers in Houston are cooperatives

and each of them provided loans to

Root River during its start-up phase.

An attorney from the local electric coop helped the steering committee file

the articles of incorporation. 

In Viroqua, a local resident who had

helped start CROPP, a successful

organic marketing cooperative, served

as an active advisor to the food cooperative. A long-time CROPP employee

serves on the board of directors and

provides valuable experience with marketing and operating. The Viroqua coop also benefited tremendously from

The new Viroqua Food Co-op includes 4,200 square feet of retail space in a 7,200-squarefoot building. Photo by Greg Lawless, courtesy University of Wisconsin

continued on page 24
Rural Cooperatives / September/October 2005 23

Based on these four case studies, we can identify four

key characteristics that contributed to the success of Root

River, Iron River and Viroqua. 

• Strong operational management — Each of the successful cooperatives employed managers who were

willing to innovate, make necessary changes, invest

and grow. The manager of Root River eliminated the

meat department manager’s position to improve the

bottom line. In Viroqua, the manager invested in technology that helped the co-op benchmark performance, improve profitability and gather the data necessary to plan an expansion. Iron River Cooperatives

hired a new manager who had run

a major business in another service

industry, so he came with financial,

personnel and marketing experience. He is leading the relocation

effort. 

• Member, community and industry

support — Viroqua, Iron River and

Root River all received substantial

leadership and financial support

from their members at start-up.

They also benefited from strong

cooperatives in their communities

that provided financial support

and/or shared expertise. Root River also got support

from local public officials, who were very interested in

attracting a grocery store to Houston. Local support

was a major factor in convincing the local bank to

make a start-up loan. Root River was the only cooperative in the group that received a commercial loan on

start-up, but Iron River is currently negotiating for a

major loan from a local lending institution. 

Cooperative industry support also helped some.

Iron River Co-op, along with dozens of other co-ops

started by Finnish immigrants, received significant

support from the Central Co-op Exchange. Part of the

challenge today is the co-op’s isolation as it works

toward a major expansion without a CCE to provide

advice, unbiased benchmark data and other support. 

Viroqua Food Co-op has tapped into a national network of food co-ops. This has clearly strengthened its

management’s hand. 

While Root River, as a “conventional grocery,” did

not enjoy similar industry support, the help it received

from long-standing local co-ops and from a cooperative lender (NCDF) was critical. By comparison, Tower Foods was relatively isolated and independent. 

• “Reasonable” competition — Although travel for

shopping is a fact of life in rural communities, the

successful cooperatives all benefited from a location

as the sole grocery store (or natural foods store) in

their immediate area. All three of the successful coops are located about 20-30 miles from their competition. 

• Dedicated organizers — The three successful cooperatives all drew on substantial leadership skills from

a dedicated group of volunteers. In Viroqua and Root

River, the volunteers had track

records to draw on from previous

businesses experience. They also

took advantage of advisors from

local cooperatives, from the local

community and within the grocery

industry. In Iron River, the cooperative was instrumental in forming

a wholesale cooperative, which

became an integral part of many

successful retail co-ops across

the northern tier of Wisconsin,

Minnesota and Michigan. 

Potential pitfalls

The case study of Tower Foods Market Cooperative

provides a detailed examination of many potential pitfalls in starting a co-op grocery. Although it might be

viewed as a unique case because of its relationship

with the Oneida Nation, it is probably safe to make the

following generalizations as contributing to its failure: 

• High turnover of leadership and management; 

• Too many “collateral” goals (which included improving the diets of the Native American population it

served, creating economic development on the 

reservation, etc.); 

• Lack of rigorous financial analysis; 

• Poor location;

• Failure to change direction quickly. 

The story of Tower Foods Market also points out

the importance of the “cooperative advantage.” A coop that lacks member support, especially during the

critical start-up phase, will lose out on the very tangible factors (financial, leadership and expertise) that

have made Viroqua, Iron River and Root River successful rural grocery stores. ■

Keys to success...and pitfalls

Tower Foods Market Cooperative was hurt

by rapid turnover in management and coop leadership, and by having too many collateral goals. USDA photo by Margaret Bau
24 September/October 2005 / Rural Cooperatives

support of the regional and national

natural food co-op network. 

Iron River was part of a movement

in the early 20th century to develop

cooperatives across northern

Minnesota, Wisconsin and Michigan.

The board and management were

instrumental in starting and supporting

a cooperative wholesaler (CCE) in

Superior and benefited from its services for years. They occasionally

attend training sessions provided by

CHS Inc., but don’t seem connected

strongly to the co-op community. The

current situation is similar to that of

Tower Foods Market, which received

sporadic assistance from cooperative

advisors and other food co-ops in the

region. But it had no consistent relationship with another local, supportive

cooperative. 

Both Root River and Tower Foods

Market had significant support from

local officials. The City of Houston

commissioned the initial feasibility

study for a downtown grocery store,

after the previous store closed. They

also contracted with a grocery wholesaler for a design and to identify operational needs. The co-op steering

committee benefited from these studies and got the support of a local

lender. 

Tower Foods Market was supported

by the Oneida Nation from its inception and received grant/loan support

based on its relationship with the

tribe. The cooperative was located on

tribal land,

next to several

service offices.

The co-op

didn’t seek

conventional

funding from

local banks,

and there is

no evidence

that it

received support from

Green Bay or

other nearby

communities.

The 2004

business plan recommended a strong

marketing plan to the larger trade

area, but the store closed before the

plan was implemented. 

Member support

Iron River and Viroqua both make

more than 80 percent of their sales to

members. Viroqua opened with 95

members in 1995 and had 1,000 members by 2004. Members’ support

allowed Viroqua to open debt-free in

1995, and members continue to show

their support with equity investments

and loans. 

Iron River has 3,500 active members, 200 of whom attended the last

annual meeting. Members are not

being asked to invest in the relocation

project through loans or equity. 

Root River makes 50 percent of sales

to non-members — many of them

tourists, who are an important component of the co-op’s profitability. The coop had 310 members when it opened in

2000, and members provided over 40

percent of the funds needed to open the

store. Membership has increased by 35

percent in 4 years, to 419. 

The organizers of Tower Foods

Market held a number of community

meetings to gather support and feedback from potential members and cusIron River Cooperatives General Manager Patrick Dooley and Board tomers. It seems clear that the co-op

President Lee Ruska. The current store (below) was built in 1929, but the

co-op is planning to build a new store. Photo by Greg Lawless, courtesy

University of Wisconsin

continued on page 30

Taking Stock continued from page 22
Rural Cooperatives / September/October 2005 25

By Alan Borst, Ag Economist

USDA Rural Development 

gricultural producers in

the United States have

long enjoyed the right to

collectively market their

products through cooperative marketing associations. This

right has been established and maintained over the last century through a

series of laws, rules and regulations

which have provided limited antitrust

protection to such producer cooperation. 

This is critical, because without

such protection, farmers seeking to

collaboratively market their products

would face a serious risk of antitrust

litigation. Beyond this enabling legal

framework, the U.S. government has

actively promoted agricultural cooperation through various policies and programs which have provided favorable

tax treatment and access to certain

program benefits.

Public officials have periodically

brought some elements of this institutional infrastructure under scrutiny.

The logical response of the cooperative community to such examination

has been to justify the public benefits

of producer cooperation and the policies and programs which enable it.

A federal commission is currently

reviewing all of the laws that provide

producers with some limited antitrust

protections. The following article is a

review of the arguments made in support of the most important federal

antitrust exemption for cooperative

associations — the Capper-Volstead

Act of 1922 (CVA).

AMC assessing need

In 2002, Congress created the

Antitrust Modernization Commission

(AMC) to determine the need for

reform of various antitrust laws. The

AMC findings will be submitted to

Congress and the President. The AMC

is a 12-member, bipartisan commission

composed of mostly antitrust lawyers. 

There are a series of working

groups under the Commission examining various aspects of U.S. antitrust

laws, including one for Immunities and

Exemptions. The Commission has

agreed to study all antitrust immunities

and exemptions to determine whether

they should be repealed (if not justified

by their benefits), or if they should

otherwise be time-limited.

The AMC has received several submissions in response to its request for

public comment in support of cooperaA

Antitrust review reveals 

strong co-op community 

support for Capper-Volstead

President Warren Harding signs the Capper-Volstead Act in 1922, which provided limited

anti-trust exemptions for farmer cooperatives. The law is currently being reviewed by the

Antitrust Modernization Commission (AMC).
26 September/October 2005 / Rural Cooperatives

tive antitrust protections. Parties submitting comments in defense of

Capper-Volstead include: the U.S.

Department of Agriculture, the

Congressional Farmer Cooperative

Caucus, the National Council of

Farmer Cooperatives, the American

Farm Bureau Federation, the National

Farmers Union, the National Milk

Producers Federation, the Oregon

Department of Agriculture and some

distinguished professors with decades

of experience in research on cooperatives and their enabling laws. There

were no submissions that were directly

critical of the CVA. The arguments in

support of Capper-Volstead in these

public comments follow.

CVA worldwide model

The Capper-Volstead Act is a model

that has been emulated around the country

and the world. CVA has been a model

of cooperative legislation which many

foreign countries have been using as a

blueprint for their own co-op laws.

U.S. government agencies are supporting the organization of agricultural

cooperatives in countries around the

world. All 50 states have enacted laws

for agricultural cooperative incorporation and many states have antitrust

exemptions for producer cooperation.

The weakening or repeal of the CapperVolstead Act would be disruptive and costly

to U.S. farmers. U.S. farmers and their

cooperative marketing associations

have relied upon CVA protection for

the last 83 years. Any uncertainty over

the future of CVA would create uncertainty over the future of cooperative

enterprises that are dependent upon its

protection. Such uncertainty could

translate into higher interest rates and

costs for co-ops. This would create

increased economic uncertainty for

farmers who are already carrying a disproportionate share of risk in their

marketing channels.

CVA remains as relevant today as 83

years ago when it was passed. Between

increasing concentration of agricultural marketing firms and increasing

international competition, U.S. agricultural producers have been confronting an even greater market

power imbalance in the marketing

channels through which they sell their

products. The large number, variety

and small size of agricultural producers compared with the fewer, larger

buyers with whom they are dealing is

still a characteristic of the U.S. agricultural sector.

Capper-Volstead will not allow producers to organize monopolies. There is little

risk that producers operating under

CVA protection will be able to exercise monopoly power in their markets,

as farmers are generally too dispersed

and independent to collaborate in that

way. Furthermore, the Act does not

grant the associations any power over

their members’ entry and exit or over

the marketing decisions of non-member producers. Even when cooperatives have a large market share they

have been unable to exercise undue

market power because of their open

membership policies, inability to control the supply of their individual

members, and their incapacity to prevent non-member competitors from

sharing in any market gains from collective action without having paid any

of the costs.

Act levels playing field

CVA only allows farmers to potentially

level their market power with corporations, which have their own organizational

advantages. Corporations have more

control over their productive assets,

while individual producers may withdraw from their cooperatives at will,

with some notice. There are also constraints in CVA which balance the benefit of limited antitrust protection.

Cooperatives are required to be democratically governed and user owned or

controlled. While corporations can

secure capital from any class of

investor, cooperatives must rely upon

user-owners.

Capper-Volstead actually needs to be

strengthened rather than weakened. One

argument along this line is that CVA

should be amended to apply to all

cooperatives, not just those involved

in agricultural marketing. Another

that was submitted was that CVA

should allow for membership of integrated producers, who are also

processors of agricultural commodities. Those who take on the risk and

burden of producing agricultural

products should be eligible, regardless

of their also being processors of the

product.

CVA already has provisions for oversight of cooperative marketing conduct.

The U.S. Department of Agriculture

has the authority to prevent cooperatives from exercising monopoly power

that results in “undue price enhancement.” Cooperatives are still accountable for their market conduct and

have been subject to antitrust litigation along with their investor-owned

rivals.

The AMC has scheduled hearings

Nov. 9 on immunities and exemptions

issues, which will cover the CapperVolstead Act and other laws of relevance to agricultural marketing cooperatives and their members. The community of cooperative advocates has

responded to the Commission’s call

for public comment with a spirited

defense of this central federal source

of limited antitrust protection for

producer marketing cooperatives. ■

The Capper-Volstead

Act is a model that

has been emulated

around the country

and the world. It

remains as relevant

today as 83 years

ago when it was

passed.
Rural Cooperatives / September/October 2005 27

By Amber Dumont 

& Donna Abernathy 

Editor’s note: This article is reprinted 

from CCA News, the newsletter of the

Cooperative Communicators Association

(Web site: www.communicators.coop). 

The article is based on a panel discussion

held at the CCA’s annual Co-op Communications Institute, held in Denver 

last summer. Dumont is communications

director at Virginia & Maryland Milk

Producers, while Abernathy operates her

own communications business based in

Murfreesboro, Tenn. 

hile it might seem

preferable to pull a

Chicken Little and run

screaming: “the sky is

falling,” when crisis

hits, the job of co-op communicators 

is to face reality and deal with the situation as professionals. Should the

unthinkable happen, it’s good to know

that others have made the journey and

lived to tell the tale.

Cooperatives come in different

shapes, sizes and varieties, yet when

they face upheaval their one commonality is the need for a crisis communications plan. It’s vital for a communicator

to have a roadmap to follow when disaster strikes. 

Sheryl Meshke, communications

director at Associated Milk Producers

Inc. (AMPI), in New Ulm, Minn.,

knows this all too well. She studied the

crisis communications plans of other

cooperatives and then developed one

for AMPI — just in case the sky should

fall some day.

10 steps for survival

When a night-time fire engulfed

much of the AMPI butter processing

and packaging plant in New Ulm last

December, Meshke was ready. She

quickly swung into action with this 10-

step communications plan:

1. Activate the emergency response

team. AMPI has an emergency plan

that designates those who should be

contacted first. This includes the

CEO, the communications director

and other management staff

involved with plant operations and

safety.

2. Unleash the crisis communication team. This is typically comprised of senior management,

including the CEO and the communications director. All communication — media interviews, releases

regarding the incident, etc. — must

funnel through this team. 

3. Designate the on-site

spokesperson. Most often, this is

the CEO or communications

director. To maintain a consistent

message, AMPI CEO Mark Furth

(CCA’s 2004 CEO Communicator

of the Year) and Meshke spoke for

the cooperative in all interviews. It

is the cooperative’s policy that only

the designated spokesperson may

give interviews, because others

may not have all the vital information.

4. Gather facts. While others on the

response team are busy doing specific jobs to handle the situation, it

is the communicator’s duty to get

the big picture by collecting all the

facts. Like the reporters who are

requesting interviews, the communicator must determine the what,

when, where, why and how.

5. Identify the primary audience for

your messages. For AMPI, there

were several key groups who wanted, and needed, to know about the

situation at the butter plant. Meshke

primarily targeted communications

to: butter plant employees, cooperative members and AMPI butter customers. After the first 24 hours of

the crisis, she also developed key

messages aimed at lawmakers and

When the sky falls

Advance planning key

to crisis communications 

W

Fire crews battle the flames at AMPI’s butter plant in New Ulm, Minn. last December. The

co-op had prepared a crisis communications plans for just such an emergency. Photo by

Sheryl Meshke, courtesy AMPI 
28 September/October 2005 / Rural Cooperatives

community leaders. 

6. Develop key messages. Stick to

just two or three, but know that

these messages will most likely

evolve as the situation progresses. At

AMPI, the designated spokesperson

consistently repeated the messages

in interviews and Meshke placed

them in all written communications.

The result: The cooperative’s

intended messages were repeated in

newspaper articles and on television

and radio broadcasts.

7. Designate spokespersons for

other audiences. Though the CEO

was tapped to speak to the general

media during the initial stages of the

crisis, Meshke recognized that her

post-fire efforts could be bolstered

by having audience-specific opinion

leaders communicating details. For

instance, the butter plant manager

became the primary communicator

to butter plant employees. 

8. Draft statements. To assure that all

messages remained consistent,

Meshke wrote talking points for all

those who were communicating on

behalf of the cooperative.

9. Work with the news media. It’s a

natural inclination to want to shutter the doors and stand behind a

“no comment” when the media

comes calling about a crisis. Meshke

took the opposite tack and reaped

the benefits. The CEO conducted

countless interviews in the first 24

hours of the crisis, even when it

meant standing outside in sub-zero

temperatures and snow. Reporters’

calls were answered promptly by

Meshke. The philosophy behind

the openness: Talking to the media

gave them an opportunity to communicate the co-op’s messages.

When reporters don’t get the story

from the authorities, they’ll go elsewhere and are more likely to get

inaccurate and/or completely false

information.

10. Go back to No. 4 and repeat as

needed. Most crisis situations last

longer than a few hours. The situation may encompass days, weeks

or months. As time goes on, your

messages will change and this

necessitates a revamping of steps 4

through 9, Meshke said. In the

first days after the fire, she was

repeating her crisis management

steps every few hours.

Dealing with a crisis is never fun,

but a cooperative communicator can

survive it. Meshke is living proof. With

the fire now several months behind

her, the communicator has put aside

her crisis communications strategies in

favor of a new task: Planning this fall’s

grand opening of the rebuilt butter

plant. 

Common threads

Disaster comes in many forms. 

Sometimes it strikes with 100-mph

winds. It may threaten the health of a

nation. 

Regardless of its form, disasters

often fall squarely into the laps of

cooperative communicators. 

There are common threads of strategy that communicators can employ to

best manage the situation. 

Stay in touch

Brad Kimbro, vice president of marketing and member services for

Florida-based Peace River Electric

Cooperative, has survived more than

11 tropical storms and hurricanes,

including three of the four that hit

Florida last year. His top tips for outwitting and outlasting disaster include:

• Maintain an up-to-date directory

of key contacts, including office, cell

phone and fax numbers. Keep information for media as well as senior

staff members and even primary customers. In Kimbro’s case that included the phone company. Keep a hard

copy of the information accessible at

some place other than your office.

Then, if the unthinkable happens

and your office becomes damaged

due to a storm or other emergency,

your communications efforts can stay

on track. 

• Plan for the unimaginable and

“communicate, communicate, communicate.” In times of disaster, your

members and others will want to

receive constant updates on the situation and it’s up to you, the communicator, to provide it.

Keep it simple

National Cattlemen’s Beef

Association (NCBA) identified bovine

spongiform encephalopathy (BSE or

Mad Cow Disease) as a crisis issue

more than 20 years ago. In 2003, when

the United States had its first confirmed case of BSE, NCBA sprang in

to action with its communication plan.

Kendal Frazier, vice president of public

opinion and issues management for

NCBA, offers these tips on handling

crisis communications: 

• Organize your resources and

“make sure everyone is at the table.”

Get as much input as possible so that

all angles of the issue are examined.

• Follow the KISS (keep it simple

stupid) method. He advised CCA

members to establish truth and facts

early in the process and then be consistent with key messages.

• Remember that “the media is not

the enemy, it is the battleground.”

Know members matter

A proposal to sell one of the

nation’s leading Farm Credit System

lenders to a Dutch co-op bank sent

shockwaves throughout the nation’s

farm co-op and ag credit communities. Doug Sims, CEO of CoBank, a

$31 billion cooperative bank comprised primarily of Farm Credit members, led efforts to avert the proposed

sale of Omaha-based Farm Credit

Services of America (FCSA) to

Rabobank Group of the Netherlands.

His advice:

• Don’t take members for granted.

Ownership matters, though it’s not

often a priority unless it’s threatened.

Communication with members and

other stakeholders is absolutely crucial. “Members are more tolerant

than the marketplace,” Sims said.

“But they need to know where the

cooperative is going and why. Then,

when the time comes to vote, they’ll

be prepared.” ■
Rural Cooperatives / September/October 2005 29

Scope of co-op law

project expanded

For nearly two years, the National

Conference of Commissioners on

Uniform State Laws (NCCUSL) has

been preparing a model state agricultural cooperative law. The draft is

based on laws recently enacted in four

states that authorize entities called

“cooperatives” that may have substantial non-patron voting and which distribute most of their earnings on the

basis of investment, rather than

patronage.

In late July, NCCUSL voted to

expand the scope of the project to

include all types of cooperatives, with

unspecified appropriate exclusions.

The draft law has been renamed the

“Uniform Cooperative Association

Act.” Representatives of several nonag cooperative groups (rural electrics,

telephone, credit unions, housing and

non-ag business cooperatives) urged

NCCUSL, to no avail, not to broaden

the scope of the effort to include nonag co-ops.

Implementation decisions, including

which types of cooperatives to exclude,

will likely be taken up by the working

group drafting the model law at its

next meeting on Oct. 21-23 in

Chicago.

NCFC surveying co-op structure

The National Council of Farmer

Cooperatives (NCFC) has distributed

two surveys to members to gauge their

views on cooperative structure. The first

survey focuses on “big picture” issues,

and is directed at cooperative CEOs. It

covers where CEOs see their organizations going in the future, the nature of

the competition they expect and the

challenges they see in continuing to

operate as a farmer-owned organization.

NCFC President Jean-Mari Peltier and

NCFC Chief Economist Terry Barr

have begun the process of interviewing

CEOs as part of the survey. 

The second survey, developed by

NCFC’s Legal, Tax and Accounting

(LTA) committee, will be directed at

cooperative CFOs and counsels. This

questionnaire asks very detailed questions about structure, use of cooperative tax provisions and, in particular,

detailed questions related to CapperVolstead. 

The surveys are important to help

NCFC formulate its policy agenda and

its response to the review of CapperVolstead by the Antitrust Modernization Commission. It will also help

guide NCFC’s work with the National

Conference of Commissioners on

Uniform State Laws (NCCUSL),

which is in the process of drafting uniform cooperative statutes that states

can enact.

At its June meeting, the NCFC

Council approved the surveys as part

of the work being done by the

Cooperative Business Advisory Group

(CBAG), which is chaired by Jack

Gherty, CEO of Land O’Lakes Inc. 

In other NCFC news, Ag Secretary

Mike Johanns has appointed Peltier to

the Agriculture Policy Committee for

Trade (APAC). “There is a great deal

at stake for American Agriculture in

the upcoming World Trade Organization (WTO) negotiations,” she said.

“The farmer cooperative community is

committed to playing a constructive

role in the process while strongly

standing up for the interests of members: this country’s 2 million farmers

and ranchers.”

Wisconsin law would allow

outside investment in co-ops 

Backers of a proposal to encourage

outside investment in Wisconsin agricultural cooperatives say it could give

NEWSLINE

Send items to: dan.campbell@wdc.USDA.gov

Responding to an article in the last issue of this magazine, several readers asked whether

Agriculture Secretary Mike Johanns still keeps a bust of fellow Nebraskan and co-op advocate Senator George Norris on his desk. The picture above, snapped in Johann’s USDA office

in August, provides the answer. The bust was presented to Johanns when he was governor

of Nebraska in appreciation for his carrying on Norris’ legacy as a champion of rural utilities.

USDA photo by Alice Welch
30 September/October 2005 / Rural Cooperatives

co-ops a badly needed financial boost

as the number of farms dwindles in the

state. But Sue Beitlich, president of the

Wisconsin Farmers Union, thinks the

idea would destroy cooperatives by

putting outside investors’ needs before

those of farmer members, according to

the Baraboo News Republic. 

State Rep. John Ainsworth and

Beitlich, a farmer in rural Stoddard,

Wis., recently offered contrasting testimony on Assembly Bill 327, which

would create a new business organization form known as an “unincorporated cooperative association” (UCA).

The bill, introduced by Ainsworth,

could affect the way cooperatives are

formed to create and market products

ranging from organic food and lowcost housing to health care.

Country Today, a Wisconsin farm

journal, ran an editorial opposing the

new law, saying it would blur the difference between co-ops and investorowned businesses: “The legislation

would allow cooperatives to have as

much as 70 percent control from nonmember investors. Allowing nonmember investor control of cooperatives goes against the nature of what a

cooperative is all about.”

Under the bill, outside investors

would be allowed to sit on a cooperative’s board of directors, and investors

could be guaranteed a percentage of

the profit, Robert Cropp, interim

director of the University of

Wisconsin Center for Cooperatives,

told the News Republic. Current law

allows outside investment in cooperatives through a preferred stock option,

but return on investment is limited to

8 percent, and the option is rarely

used, Cropp said. Although the bill

affords outside investors some voting

rights, majority control would remain

in the hands of user members, also

known as patrons, under the bill,

Cropp said. It’s unlikely existing agricultural cooperatives would convert to

UCAs because of potential federal tax

liabilities, the paper notes. 

The bill would essentially strip

some of the safeguards that help protect cooperative members, who might

have spent the better part of a lifetime

investing in a cooperative, Beitlich

said.

Co-op wants incentives for buyout

payments to fund value-added ag

Under the American Jobs Creation

Act of 2004, some agricultural quotas

will be involuntarily eliminated under

a 10-year buyout program. Absent an

incentive to continue engaging in agricultural production, many recipients of

the quota buyout payments may simply

use the after-tax proceeds of their buyout payments to retire or invest outside their rural communities. This

would have adverse effects on jobs and

economic development in rural communities already struggling to recover

from reduced agricultural production,

according to Wayne Sine, director of

corporate taxation for Southern States

Cooperative Inc., Richmond, Va. 

However, with clarification of provisions in the Internal Revenue Code,

many quota holders would consider

reinvesting in agricultural ventures

within their local communities. “This

would preserve or expand job opportureceived overly optimistic feedback

from surveys and interviews. The store

opened with 266 members in 2002,

among a target population of 8,876.

Per-customer weekly expenditures had

been estimated at $30, but was actually

only $9. While the co-op had aimed to

garner 60 percent of business from

non-Native Americans, only about 20

percent of the co-op’s business was

non-Native. 

Quality of the business plan 

Each of the cooperatives in this

study differed considerably in their

experience with business plans.

Viroqua, which grew from $290 in

annual sales per square foot in 1996 to

$1,166 per square foot in 2003, was

started without a business plan. After

start-up though, subsequent expansions have been well researched and

planned. 

The organizers of the Viroqua coop never wrote a business plan, but

they had the advantage of 5 years of

experience running a food-buying

club for 40 members. Like many

1970s-era natural food cooperatives,

the retail store was an outgrowth of

the buying club’s desire for a storefront grocery. Because members were

able to “self-finance” the start-up,

they didn’t need to write a business

plan for a lender. 

The Root River Co-op didn’t start

as a buying club, but the organizers

were basically re-starting a grocery

store that had been reasonably profitable in the same location. The former

owner shared all of his financial

records with the steering committee,

and the co-op also had access to a business plan previously commissioned by

the city of Houston. Along with the

substantial commitment of equity and

unsecured loans from members, the

business plan helped to convince a

local bank to lend the co-op the balance of the needed start-up capital. 

The founders of Iron River

Cooperatives may not have written a

business plan before it opened in 1916,

but the co-op is in the process of

putting together a detailed plan to support the request for the capital needed

to relocate the store. Co-op leaders

have conducted member surveys and

worked with a distributor to create

accurate sales and operating projections. 

Community members began planning for a grocery in the Oneida area

in 1996. Two market analyses were

conducted by wholesale suppliers (in

1996 and 2000), and both were significantly overly optimistic. A needs

Taking Stock continued from page 24
Rural Cooperatives / September/October 2005 31

nities and economic development in

those rural communities which the

buyout program was designed to

assist,” says Sine.

America’s farmers are diversifying

and investing in alternative agricultural

operations, establishing or expanding

value-added and other agricultural

cooperative enterprises. Co-ops, producer-owned LLCs and partnerships

are building processing plants, establishing innovative marketing enterprises and alternative energy plants. This

process would accelerate if more buyout funds can be devoted to such ventures, he says. 

“This proposal would clarify involuntary conversion treatment when the

recipient of quota buyout payments

elects to reinvest such amounts directly

in domestic, value-added agricultural

enterprises or other agricultural cooperative associations,” says Sine. “Many former agricultural quota holders and producers would be interested in investing

in such ventures should the capital gain

tax on their involuntarily converted quotas be deferred.”

Contact Sine at (804) 281-1301 or

at wayne.sine@sscoop.com for more

information.

Minn. sugar co-op buying

Holly Sugar from Imperial

Southern Minnesota Beet Sugar

Cooperative, Renville, Minn., has

agreed to purchase Holly Sugar

Corporation, a subsidiary of Imperial

Sugar, for about $50 million. The sale

was expected to be completed by the

end of September, subject to completion

of environmental, due diligence and customary regulatory approvals. Holly

Sugar’s primary operations include two

beet sugar factories, located in Brawley

and Mendota, Calif., a distribution facility located in Tracy, Calif., and Holly

assessment survey was conducted

among community members. It

showed mixed support for the cooperative, and the 2000 market study identified potential problems with the size

and location of the store. In spite of

these concerns, the study predicted

profitability in the first year. 

Finance

The start-up financing for each

cooperative differed considerably.

Viroqua met its financial goals solely

through member investment. It needed

$20,000 to open the store and received

a major boost when one member

bought $10,000 worth of stock. 

Root River financed its start-up

with a combination of member stock

(310 members at $100 each) and unsecured member loans of $137,700

(including $20,000 in loans from two

local co-ops) in addition to a loan from

a local bank. 

Iron River was financed by its members at start-up in 1914, but it is working with a local bank to finance its

$2.5-million relocation project.

Although the members voted overwhelmingly to approve the expansion,

there are no plans to raise funds from

members. Members invest through

their patronage and the co-op regularly pays a patronage refund. 

Tower Foods Market was funded

through a $250,000 contribution

from the Oneida Nation, along with a

$460,000 revolving loan from USDA

Rural Development (via the tribe).

Member equity was less than 1 percent of financing at start up, and

there were no bank loans. The availability of “institutional dollars” meant

that organizers did not have to press

tribal members to contribute equity,

nor did they have to subject their

business plan to the rigor of a commercial lender. 

Board and management leadership 

The three successful cooperatives

studied have had good continuity with

experienced managers. The original

manager at Root River is still there

after 4 years. Viroqua has had the

same manger since 1998 and Iron

River’s manager has served since 2000. 

By contrast, Tower Foods Market

had four managers in 2 years. It also

experienced high turnover in community leadership. Twenty-five individuals

served on the steering committee and

board between 1999 and 2004. When

the store opened, a completely new

and inexperienced board took over. 

Viroqua has had regular board

turnover, but no trouble finding new

people to run for the board. When the

cooperative was getting ready to open, a

core group of 20 members put in hours

of sweat equity to renovate the space.

As board members or regular members,

This Holly Sugar plant in Brawley, Calif., is one of four plants Southern Minnesota Beet

Sugar Cooperative is negotiating to buy. Holly is a subsidiary of Imperial Sugar. Photo courtesy Imperial Sugar

continued on page 32
32 September/October 2005 / Rural Cooperatives

Hybrids Inc., a beet seed processor and

marketer located in Sheridan, Wyo. 

Holly Sugar, which represents

approximately 15 percent of Imperial’s

production capacity, primarily services

customers in the industrial and food

service market segments. Imperial will

continue to own the Holly brand. 

Policinski to succeed Gherty 

Land O’Lakes Inc. has named Chris

Policinski the co-op’s president and

chief executive officer, effective Oct. 1.

Policinski will replace Jack Gherty,

who is retiring after 35 years with

Land O’Lakes, the last 16 years as

president and CEO. 

Policinski, currently Land O’Lakes

executive vice president and chief

operating officer for dairy foods, has

held various leadership positions with

the company since joining the national

food and agricultural cooperative in

1997. He has more than 25 years of

management experience and previously

held leadership positions with General

Foods, Kraft Foods, Bristol Meyers

and Pillsbury Co.

“Chris has demonstrated his ability

to implement strategic plans, drive

performance and develop people and

leaders within the company,” said

LO’L Chairman Pete Kappelman. “He

also understands the unique role of

cooperatives and is committed to positioning Land O’Lakes to enhance

member-owner value.”

Policinski has a master of business

administration degree from New York

University and a bachelors’ of business

administration from the University of

Notre Dame. He is a board member of

the National Milk Producers

Federation, serves on the President’s

Council of the Grocery Manufacturers

of America and is chairman of the nonprofit, charitable organization

Prosperity Worldwide.

In other LO’L news, the co-op has

completed the sale of its 38-percent

equity interest in CF Industries, a

domestic fertilizer manufacturing company. The co-op was initially slated to

reduce its ownership position from 38

percent to approximately 8 percent in

exchange for $252 million in cash.

However, underwriters exercised their

option to purchase LO’L’s remaining

interest in CF, increasing the co-op’s

total proceeds to $315 million.

Bruce Anderson honored

Bruce Anderson, who retired in

June from the ag science faculty at

Cornell University, was honored at the

annual banquet of the Northeast

Council of Cooperatives for 25 years

the co-op has been able to draw on a

dedicated group of supporters. 

Iron River has an experienced

board, with tenure of up to 15 years.

Root River also has had good board

continuity. The steering committee

that started the co-op had a good balance of skills and shares responsibilities

well. Some of these founders are still

on the board. 

Business growth patterns 

Each of the co-ops opened in a

different environment, and each of

them proceeded slightly differently.

Viroqua started with a core of a successful, 40-member buying club,

opened in a small storefront, remodeled it extensively, reached 1,000

members and now is planning to

relocate. The manager has invested in

training and efficient systems, so the

co-op has been able to increase sales

steadily and prepare for significant

expansion. 

Tower Foods opened in a new location (for a grocery store), with a fullservice, 8,000-square-foot store. There

were discussions about changing the

product mix to more profitable natural

foods, but the offerings never changed

before the store closed after 2 years.

Sales were significantly under projections during that entire period. 

Root River opened on the site of an

existing grocery store and used that

store’s records to estimate sales. This

proved to be a reasonable estimate,

and sales have held steady since the

store opened in 2000. The manager

cut operating costs in order to achieve

profitability, which has been modest

but consistent.

Iron River has operated for more

than 90 years, but most details of its

business growth were beyond the

scope of this report. The current store

has done well enough to develop plans

Chris Policinski Jack Gherty

Taking Stock continued from page 31
Rural Cooperatives / September/October 2005 33

of service to Northeast co-ops.

Anderson developed a popular undergraduate course on cooperatives and

served as a major professor for many

graduate students who have gone to

work for co-ops worldwide and in

academia. A nationally recognized

speaker on co-op enterprises and an

advisor to many co-op boards,

Anderson also helped to expand what

started as the New York Council of

Co-ops’ educational meeting into a

regional event that has attracted thousands of co-op directors and managers

over the years. 

Riceland’s Bell named 

Arkansas Ag Secretary 

Retired Riceland Foods CEO

Richard Bell has been selected by

Arkansas Governor Mike Huckabee as

the state’s first agriculture secretary. “If

we looked from one end of the country

to the other, we would not be able to

find someone who has the experience,

the expertise and, most of all, the love

of Arkansas, that Dick Bell has,”

Huckabee said. “Agriculture is the

leading industry in our state, accounting for some $13 billion a year of economic activity, representing 20 percent

of the gross state product.” 

Bell is credited by many with transforming Riceland into the nation’s top

marketer and miller of rice. He was

with Riceland for 27 years, including

23 years as president and CEO, before

retiring last year. 

PastureLand artisan butter 

wins tops honors from ACS 

PastureLand’s Summer Gold salted

butter won first place honors for the

second year in a row in the prestigious American Cheese Society (ACS)

competition. In addition, the co-op’s

Summer Gold unsalted butter placed

third in its category. Complete competition results are available on the

ACS Web site:

www.cheesesociety.org.

PastureLand is a cooperative of

three organically certified family farms

in Southeastern Minnesota that has

been marketing artisan butter and

cheese since 2000. 

The butter’s distinctive flavor and

color reflect the quality of the cream

from which it is made, says board

President Dan French. PastureLand

cows graze on carefully managed pastures rich in carotene, resulting in

golden-yellow milk which is perfectly

suited for butter making,” adds

French. 

French and his wife Muriel milk

140 cows on their third-generation

family farm near Mantorville, Minn.

“We are also lucky to have such a

skilled butter maker in Gene

Kruckeberg, who makes our butter at

the Hope Creamery in Hope, Minn. 

For more information about

PastureLand, visit the co-op’s Web

site: http://www.pastureland.coop.

for relocating to a 15,000-square-foot

store. The cooperative also owns a

hardware store at a separate location

and shares some administrative costs

with that store. 

Market niche

Communities are very interested in

having grocery stores, but don’t always

support these local businesses. A

strong niche-market can be very helpful in overcoming the inherent challenges of running a small, low-profitmargin grocery. 

Three of the cooperatives were started as full-service grocery stores, serving

as small, local competitors to large,

regional grocery stores that dominated

the market. They benefited from their

locations as the sole grocery store in a

rural community, but they also faced

strong competition from regional stores. 

Root River is located on a highway

near a state park, which creates heavy

summer traffic. It is on the site of a

previous grocery store and thus benefits from that site identity. It also rents

space to a local pharmacist. 

Iron River also provides an additional needed service in the community through its ownership of a hardware

store. 

Tower Foods suffered from a poor

location and never drew enough customers through marketing efforts.

Sales figures were one-third of projections. The groceries stocked were “100

percent conventional,” and members

commented that the store had no

“Oneida identity.” Local products were

not available at Tower Foods, and it

was challenged by the many collateral

goals: economic development, better

health and tribal self-sufficiency.

Keeping all of these goals in balance

wasn’t easy for the organizers, managers or board members. 

Viroqua’s natural foods focus gave it

a unique identity in the marketplace.

The founders knew that there was

strong support for natural foods

among some community members,

and the competition in that niche was

over an hour away. ■

Bruce Anderson
34 September/October 2005 / Rural Cooperatives

PenLight celebrates 80 years

Peninsula Light Co.

(PenLight), Gig Harbor, Wash.,

is marking 80 years serving Gig

Harbor and the Key Peninsula.

PenLight was founded in 1925

when a small group of community leaders implemented their

vision of bringing electricity to

the area. This group of pioneers

had only a vague idea of how to

accomplish the task, because

electricity was still a new commodity in rural communities. 

Getting the organization off

the ground took several months

of preparation: raising capital,

recruiting the know-how and

choosing a form of government to

oversee the utility. After numerous

community meetings, they decided

that it should be a cooperative-run

business. 

PenLight is committed to improving the quality of life of its members

by providing reliable power and safe

drinking water, and by supporting the

social and economical development of

the community. It is the second

largest electric cooperative in the

state, providing nonprofit electric service to 28,000 members over 880

miles of line. It offers a voluntary

green power portfolio option to its

members.

Rick Smith named

DFA president & COO

Rick Smith, a member of

Dairy Farmers of America (DFA)

management team since 2001,

has been named president and

chief operating officer for the

Kansas City-based co-op. “We

like the energy and the skills that

Rick’s long track record in cooperatives, member services and

management bring to our cooperative team,” said DFA CEO

Gary Hanman. All of DFA’s

operations will report to Smith. 

In 2001, after Dairylea

Cooperative Inc. became a cooperative member of DFA, Smith

assumed the role of vice president and

chief operating officer of DFA’s

Northeast and Mideast milk marketing

areas. That role was expanded in 2003

when he became president of DFA’s

seven fluid milk marketing areas. Since

January 2005, Smith has served as

DFA’s chief operating officer with the

50 percent owned by agricultural producers or other entities that are more

than 50 percent owned by agricultural

producers.

Deduction for costs of complying 

with EPA sulfur rules, pass through

The Environmental Protection

Agency (EPA) has issued rules requiring refiners to start producing diesel

fuel with a sulfur content of no more

than 15 parts per million beginning

June 1, 2006. The Jobs Act allows a

small business refiner to elect to

deduct 75 percent of capital costs

incurred during each tax year to comply with the EPA sulfur rules.

The Energy Act provides that a

cooperative small business refiner may

elect to pass the deduction through to

any other cooperatives holding a direct

ownership interest in the cooperative

refiner, on the basis of the extent of

that ownership interest (not patronage). The refiner cooperative must

provide written notice of the pass

through to its cooperative owners

before the date on which the tax return

is due, noting the pass through is due.

Equipment deduction 

In an attempt to enhance this

nation’s refinery capacity, the Energy

Act allows an immediate expensing of

50 percent of the costs of constructing

new oil refineries and upgrading existing ones located in the United States.

The resulting deduction may be taken

in the year the qualified refinery property is placed in service.

Pass through rules similar to those

for the EPA sulfur rule deduction

apply here. A cooperative refiner may

elect to pass the deduction through to

any other cooperatives holding a direct

ownership interest in it, on the basis of

the extent of that ownership interest.

The refiner cooperative must provide a

written notice of the pass through to

its cooperative owners before the date

on which the tax return is due, noting

the pass through is due.

Renewable fuels mandate increases

Corn and other agricultural markets

should get a boost from language in

the new law that requires a doubling of

the use of renewable fuels (ethanol and

biodiesel) in gasoline, to 7.5 billion

gallons per year by 2012. This should

play a part in reducing our dependence

on foreign oil while increasing the

demand for crops that can be

processed into renewable fuel. It will

also create new opportunities for producer-owned cooperatives to generate

income for their members and economic development in the rural communities where they are located. ■

Legal Corner continued from page 14

PenLight’s original headquarters in Gig Harbor, Wash. The

co-op just notched its 80th anniversary. 
Rural Cooperatives / September/October 2005 35

added responsibility of oversight for

the cooperative’s economic and marketing analysis; member, government

and public relations; and human

resources functions, as well as fluid

marketing operations. In his new job,

he will oversee all of DFA’s operations,

including value-added manufacturing,

accounting/treasury and legal and risk

management functions. 

Smith continues to serve as CEO of

Dairylea Cooperative Inc., a dairy

farmer-owned agricultural marketing

and service cooperative based in

Syracuse, N.Y. Dairylea markets milk

for more than 2,500 member farms in

the Northeast. He also heads up

numerous businesses which provide

services to farmers, including: insurance, dairy management, lending, livestock, information services, risk management and purchase programs for

farm inputs. He joined Dairylea in

1982 as the cooperative’s vice president

and general counsel. 

Anderson elected chairman

of U.S. Grains Council

Davis Anderson, GROWMARK

vice president of grain, was elected

chairman of the United States Grains

Council following its 45th Board of

Delegates’ Meeting in Seattle, Wash.,

in July. The Grains Council is a private, nonprofit partnership of farmers

and agribusinesses committed to

building and expanding international

markets for U.S. barley, corn, grain

sorghum and products derived from

them. The Council is headquartered

in Washington, D.C., and has 10

international offices that oversee programs in nearly 80 countries. Support

for the Council comes from its members and the U.S. Department of

Agriculture. 

CDF establishes hurricane 

recovery fund

Citing the need to help the longterm recovery of rural areas of

Louisiana, Mississippi and Alabama,

the Cooperative Development

Foundation in early September

launched the Katrina Cooperative

Recovery Fund. The fund will direct

contributions specifically to individuals

and cooperative businesses in the rural

areas of the three hurricane-ravaged

states.

“The nation has been horrified by

the scenes from New Orleans, Biloxi

and Gulfport,” said CDF Chair Terry

Lewis, a vice president with the

National Cooperative Bank. “We can

only imagine the destruction that has

also occurred in rural areas. The

Katrina Cooperative Recovery Fund

will direct contributions to individuals

and cooperatives in rural areas that

most need help.”

The fund will seek contributions

from all sectors of the cooperative

business community and the public.

“This is all about co-ops helping coops,” said Lewis. “Our focus is on what

will be necessary for recovery once disaster relief has met most immediate

needs.” 

CDF will partner on this fund drive

with its colleagues in the cooperative

community, both nationally and in the

region, to assure the maximum possible impact. CDF will take no administrative fee for funds raised to assure

that 100 percent of the funds donated

reach the people and organizations

that need help. CDF’s prime point of

contact in the affected area will be the

Federation of Southern Cooperatives/

Land Assistance Fund, which will help

identify the needs of farmers and farm

cooperatives and help CDF coordinate

this effort with the wider cooperative

community in the affected area. 

For more information, visit:

www.cdf.coop. 

Reynolds receives Honored 

Cooperator Award 

Anne Reynolds, assistant director of

the University of Wisconsin Center for

Cooperatives, recently received the

National Cooperative Business

Association’s Honored Cooperator

Award. Reynolds, of Madison, Wis.,

was honored at the Association of

Cooperative Educators (ACE) Institute

in Alexandria, Va. The award recognizes outstanding individuals who have

worked to develop, advance and protect cooperatives. 

At the UW Center for

Cooperatives, Reynolds works with

groups on new cooperative projects,

particularly in the housing area. In

addition, Reynolds has participated in

research and cooperative development

projects in the areas of member satisfaction and loyalty, education for

emerging leaders, value-added agriculture, and rural housing. She also is

responsible for the Center’s Internetbased services and serves as coordinator for the Midwest Cooperative

Education, Research and Extension

Consortium. 

Before joining the Center for

Cooperatives, Reynolds worked at the

Credit Union National Association

(CUNA). 

Co-op celebrates 80 years

Celebrating its 80th anniversary is

Peshastin Hi-Up Growers Inc., in

Peshastin, Wash. In the early 1900s

the co-op was known as the Brownie

Warehouse and packed tree fruit under

the Brownie label. The Hi-Up name

was adopted to indicate the co-op’s

fruit is grown in higher mountainous

areas of the upper Wenatchee River

Valley, according to the Capital-Press

Agriculture Weekly. The Hi-Up label

has been used since the 1920s. More

than 100 growers are co-op members.

The co-op will pack more than 1 milAnne Reynolds
36 September/October 2005 / Rural Cooperatives

lion 44-pound boxes of pears, mostly

winter varieties. The co-op also handles apples.

Struggling Kansas

local co-op dissolves

The board of the Sylvia Cooperative in Reno County, Kan., which first

opened for business in the 1930s, has

voted to dissolve. “It’s sad to say, but

it’s gone,” said Derek Zongker, secretary of the co-op board, according to

the Associated Press. 

The co-op sold a grain elevator that

could store 700,000 bushels of grain, as

well as supplies, including seed, feed,

fuel and farm chemicals. Board President Steve Yust said the grain, fuel and

seed business failed to finish in the

black the past 8 years. In June, stockholders approved a lease/purchase of

the grain elevator by the Stafford

County Flour Mill in Hudson. The

lease gives the business until April to

buy the elevator from the lien holder,

Citizens Bank of Kansas.

Crop production in the area also

has dropped as more acres are being

enrolled in the Conservation Reserve

Program, which pays farmers to set

aside croplands. The wheat harvest this

year brought in 310,000 bushels of

grain, filling only half the elevator’s

capacity. Members of the co-op board

said a leak in an underground fuel

storage tank, and the bankruptcy of the

parent Farmland Industries Inc., which

forced the co-op to write off $240,000

on its asset sheet, also contributed to

the co-op’s decline. 

New hotline for 

sustainable ag pubs 

The Sustainable Agriculture

Network (SAN) has a new hotline that

will help producers, researchers and

educators quickly and easily order 

publications featuring cutting-edge

research on sustainable farming. As 

the national outreach arm of USDA’s

Sustainable Agriculture Research and

Education (SARE) program, most

SAN publications will continue to be

available online at: www.sare.org/

publications. 

For book orders and mixed orders

of books and bulletins contact:

Sustainable Agriculture Network, P.O.

Box 753, Waldorf, MD 20604-0753;

telephone: (301) 374-9696; Fax: (301)

843-0159. For bulletins only, please

call (301) 504-5411. SAN bulletins are

available in quantity at no cost to agricultural educators when ordered at

least 3 weeks in advance. View SAN’s

entire catalog online at the above Web

site. Revised order forms are available

at http://www.sare.org/

publications/order.htm. 

Bill expands health care co-ops

Wisconsin Governor Jim Doyle

recently signed legislation that expands

access to health care cooperatives in

Wisconsin and makes it easier for

farmers and small business owners to

get quality and affordable health insurance. In June, the U.S. Senate Agriculture Appropriations bill was passed

in committee that included a provision

sponsored by Senator Herb Kohl and

Congressman Dave Obey to provide

$2.25 million for a Wisconsin farmer

health care cooperative to increase

access to affordable health benefit

plans. 

According to a study by the

University of Wisconsin, 18 percent 

of Wisconsin farmers are uninsured,

compared to 4 percent of the general

population. In addition, 41 percent of

those farmers who have insurance do

not have insurance for every family

member. 

Isolated Alaksan villages

get USDA help for Internet

Akhiok – a remote fishing village of

51 people on the south end of Alaska’s

Kodiak Island — may be wired for

Broadband Internet service by next summer, thanks to a grant from USDA

Rural Development. Ouzinkie and Old

Harbor on Kodiak are also potential

sites for Internet service. All three villages have phone lines, but the high cost

of dial-up access limits use, according to

the Kodiak Daily Mirror. Under the

grant, USDA Rural Development pays

about 75 percent of the cost. Residents

still have to pay installation charges for

their homes, but the cost would now be

affordable. Jobs are scarce in the communities, and most residents rely on

“native skills” to survive. 

Co-op Month material on Web

October is Cooperative Month,

when cooperatives are urged to undertake some special activities to create

better public understanding of what

co-ops are and do. Through a combination of media outreach, member

education and interaction with policy

makers, co-op month events help raise

the visibility of cooperatives. 

Research shows that when consumers know a business is a cooperative, they are more likely to do business with it. And with consumer trust

in co-ops topping investor-owned

companies, promoting your business

as a cooperative is a win-win proposition.

A wide variety of Co-op Month

promotional tools are available on the

Internet at: www.coopmonth.coop.

These include logos, advertisements, a

co-op primer, co-op case studies and

success stories, a co-op directory, Coop Month tool kit, etc. Even something as simple as posting a link on

your co-op’s Web site to the Co-op

Month Web site can help increase

public awareness of what co-ops do.

“Cooperatives: Owned by our

Members, Committed to our

Communities,” is the Co-op Month

theme, which reflects the commitment all types of cooperatives make to

the seventh cooperative principle:

concern for community. It is a principle that co-ops exercise every day as

they serve their members and their

communities. It also allows cooperatives to trumpet not just the economic

support they provide to their members and communities by creating

jobs, income and opportunity, but also

their other community involvement,

such as charitable contributions, educational activities, environmental

efforts and many other ways in which

cooperatives support the towns and

cities in which they operate.
Rural Cooperatives / September/October 2005 37
38 September/October 2005 / Rural Cooperatives

Co-op Foundation awards grants 

The Cooperative Foundation

recently approved the funding of three

grants for cooperative education to:

Consumer Cooperative Management

Association (CCMA), CooperationWorks! and the Association of

Cooperative Educators (ACE). 

CCMA — a professional association

for managers, staff and directors of

retail food cooperatives — received a

$3,750 grant to help Midwestern

members attend an annual co-op conference. CooperationWorks! received a

$5,000 grant for its cooperative business development training program,

The Art and Sciences of Starting a

Cooperative Business, where practitioners learn from expert- and case studybased sessions. The grant will serve as

financial assistance for practitioners

who may not be able to attend the

training otherwise. 

ACE was awarded a $3,500 grant to

support 2005 ACE Institute scholarships for graduate students and junior

faculty. ACE provides its members a

forum to highlight programs and practices that increase understanding,

innovation and professionalism in

cooperative education. The St.Paulbased Cooperative Foundation

(www.coopfoundation.org) has supported cooperative business development, education and research projects

in the Upper Midwest for more than

50 years. Projects include all co-op

business sectors.

Walton EMC sends crews

to storm-wracked Mississippi

Five electric crews from Walton

Electric Membership Corporation

(EMC) were dispatched to southwest

Mississippi just a day after Hurricane

Katrina to help restore power to victims. The crews assisted Southwestern

Mississippi Electric Power Association

(SMEPA), based in Lorman. SMEPA

serves 25,000 customers in nine counties in the southwest corner of the

state, all of whom lost power. 

Since electric cooperatives follow

the same power line construction standards, the Walton EMC crews went

right in to Lorman, working side-byside with local crews or independently.

Electric crews face many hazards after

natural disasters. Fallen trees can put

excess tension on wires and flooding

can make access to repairs difficult.

The rising waters can also displace

poisonous snakes and make mosquito

populations explode. 

“There is also the hazard from

incorrect use of standby generators,”

said Greg Brooks, WEMC spokesperson. “Small generators can put several

thousand volts back out on power lines

if they are not correctly installed, presenting a hazard for line technicians or

anyone else who may come in contact

with them.”

Walton EMC is a customer-owned

power company that serves 110,000

accounts between Atlanta and Athens.

Learn more at: waltonemc.com. and

southwestepa.com. ■
Rural Cooperatives / September/October 2005 39

By Peter Thomas, Administrator

Business and 

Cooperative Programs

USDA Rural Development 

nergy and the issues surrounding it continue to

be a high priority for the

Bush Administration and

USDA. The recent passage of the Energy Policy Act of 2005

emphasizes the importance the

President and Congress place on the

issue. 

Rural Development has already

played a significant role within USDA

as a result of the 2002 Farm Bill and

the establishment of the Renewable

Energy Systems and Energy Efficiency

Improvements Program (also know as

the Section 9006 program). The funding from this program assists rural

energy entrepreneurs in covering the

costs of setting up and running these

renewable energy systems and energy

efficiency improvement projects. 

To better illustrate the goals of the

program, I’m going to focus on projects which received grants through the

9006 program. In addition to the

grants, recent changes to the program

will allow USDA Rural Development

to offer guaranteed loans to qualifying

projects.

In Lodi, Calif., Castelanelli Brothers

Dairy received a $166,000 Section 9006

grant in fiscal 2003. The funds helped

the dairy farm establish a renewable

energy system which uses an anaerobic

digester to convert cow manure into

electricity. Anaerobic digestion is one of

the few treatment options of manure

that reduces the environmental impact

of manure and can potentially produce

savings and revenues. 

A properly designed and operated

digester can biologically stabilize

organic wastes, reduce pathogens,

reduce odor and improve fertilizer

value, in addition to generating electricity from the biogas produced from

digestion. It will produce 60,000 to

130,000 cubic feet gas daily, depending

on the season. 

The manure from the farm’s 2,100

cows will produce 90 to 180 kilowatts.

Another bonus: after the water flows

out of the digester, it is stored and then

recycled to flush manure from the

barns, or used seasonally to fertilize

field crops and grapes. 

With the assistance of a Section

9006 grant, the Dairyland Power

Cooperative in Elk Mound, Wis.,

installed its first anaerobic digester

“cow-power” facility. The new facility

is expected to generate 775 kilowatts of

renewable energy, capable of powering

600 homes throughout the four-state

area serviced. As is the case for all

anaerobic digesters, cow manure from

the dairy is collected and heated

in the digester tank, a process

that creates methane gas. This

biogas is used to generate electricity. 

Gold Top Farms, a family farm

in Knox, Maine, was one of 167

recipients from 26 states to

receive program funding last year. The

farm was the first recipient from

Maine. The family received a $4,462

Section 9006 grant, which represented

25 percent of the project cost. The

funds were used to install three highvolume, low-speed fans, saving 90,000

kilowatt hours annually. This resulted

in the farm saving around $8,000 a year

over the cost of operating existing 24

fans. The new high-efficiency fans lead

to energy efficiency, healthier livestock

and ultimately higher productivity.

I commend these farmers and other

project owners for taking advantage of

the Section 9006 program. They are

providing rural America with renewable

energy and making their own operations more energy efficient. This has

resulted in cleaner energy and saved the

recipients money in the process. 

These projects have also created

new jobs while injecting new capital

into rural communities. As America

looks for alternative energy, USDA

Rural Development will continue to

assist rural communities in taking

advantage of the new technologies and

innovations for nontraditional sources

of energy. ■

INSIDE RURAL DEVELOPMENT

E

Gold Top Farms in Maine (left) is saving

90,000 kilowatt hours of electricity annually with high-volume, low-speed fans in

its barn. Above, an anaerobic digester

converts cow manure into methane gas,

which in turn produces electricity.

USDA energy program 

promotes ‘cow power’
40 September/October 2005 / Rural Cooperatives

United States

Department of Agriculture

Washington, DC 20250

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