Rural

COOPERA COOPERATIVES

Wine co-op takes root ine co-op takes root

page 9

USDA / Rural Development January/February 2006

Rural Cooperatives / January/February 2006 3

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Rural COOPERA COOPERATIVES

January/February 2006 Volume 73 Number 1

p. 4

p. 9

p. 16

p. 20

FEATURES 

4 Making the Grade

Off-grade potatoes have a home, thanks to Keystone plant 

By Dan Campbell

9 Fruits of Their Labor

Co-op winegrowing takes root in North Carolina

By Bruce Pleasant

14 Voice of experience: co-ops are resilient

By Scott Yates

16 Trade, Farm Bill challenges 

eyed at dairy conference

By Dan Campbell

20 Foreign Affairs

Co-op leaders share strategies for pursuing global markets

By Stephen Thompson

25 Largest 100 ag co-ops 

post strong margins in ‘04

By David Chesnick 

32 An Art & Science

Revised co-op curriculum gets test drive in Madison

By Jane Livingston

DEPARTMENTS

24 LEGAL CORNER 

30 VALUE-ADDED CORNER

35 MANAGEMENT TIP

37 NEWSLINE

47 INSIDE RURAL DEVELOPMENT 

On the Cover:

A vine laden with Chardonnay grapes awaits harvest. See page

9 for a look at how wine grape growing is making a comeback in

North Carolina. Photo contributed by Rodney Lough, a prize-winning photographer who specializes in outdoor photography. 

See more of his work at: www.theloughroad.com.
By Dan Campbell, Editor

tanding in a steady drizzle under a

steel-gray October sky, Cory

Schlegel and several other men are

peering at the gauges on a control

panel, trying to find the kink that has interrupted the flow of gas under the road to the

new Keystone Potato Products plant. The huddle takes place on a giant landfill, the final resting place for trash from all over the Northeast.

Decomposing garbage is the source

for the methane gas that

provides fuel for the steam Keystone needs to

process fresh spuds into 40-pound bags of

dehydrated potato flakes. 

The culprit for the power interruption ultimately proves to be a defective switch that shut

down one of the blowers that drive methane

gas into and through the underground pipeline

that leads to the plant, located near the town of

Hegins in the Appalachian Mountains of eastern Pennsylvania.

4 January/February 2006 / Rural Cooperatives

Making the Grade 

Off-grade potatoes now have a home

thanks to Keystone dehydrator plant 

S
When the methane gas system shuts

down, the plant’s back-up propane

burners kick on, so the potatoes keep

rolling. “But we hate to have to use the

propane because of the higher cost,”

explains Schlegel, the plant’s general

manager. Indeed, it was the availability

and economics of a low-cost, waste-toenergy power source that was the

lynchpin for getting this $12 million

project built. 

There’s a lot riding on the outcome

of the effort. This plant could play a

major role in determining whether

Pennsylvania’s fresh-market potato

industry stabilizes and grows or

continues to contract. The

Keystone plant — the only one of

its kind east of the Mississippi

River and outside Maine — was

built so that growers here could

stop dumping their off-grade

potatoes or giving them away for

cattle feed. 

“For our industry to be viable

in fresh markets, we need to have

a market for our off-grade potatoes as well,” says Keith Masser,

president of Pennsylvania

Cooperative Potato Growers Inc.,

one of the nation’s oldest co-ops,

and the largest of 42 stockholders

in the LLC that was formed to

build and operate the plant.

Masser is also president of the

Keystone board and runs his family potato farm and a large packing

house (Sterman-Masser) in nearby

Sacramento, Pa. Masser is the second biggest stockholder in the

LLC.

In the early 1950s, about 100,000

acres of potatoes were planted in

Pennsylvania. “Today we grow less than

12,000 acres,” says Masser, whose family grows about 600 acres of spuds. “Our

decline has gone out West.” 

Competing with the NW

Producers in the Pacific Northwest

dominate America’s potato industry, and

growers there have long had the advantage of access to processing plants

where they can sell their off-grade potatoes. This has given them a considerable marketing advantage, Masser says.

He’s long been convinced of the need

for a plant like Keystone in the East —

ever since returning to the family farming operation in the late 1970s after

several years working in the paper

industry for Proctor & Gamble.

Buyers in the East typically have to

pay about 12 cents per pound more for

fresh potatoes than do their counterparts in the West, he notes. To offset

that differential, a cheap source of energy was needed for a processing plant.

Attention was first focused on one of

the half dozen or so small co-generation

power plants located in the region that

burn waste coal to produce electricity. 

“The coal industry wasn’t as efficient

in the past, so a lot of good coal went

out with the rock deposited in waste

piles that built up over the past century.

There’s still a lot of energy in it,”

Masser explains. These co-generation

plants use steam turbines to generate

electricity, but just blow off the excess

steam as a useless byproduct.

The original idea was to build the

plant next to one of these co-generation

plants and use that waste steam for running the driers, peelers and blanchers.

“We pursued that idea aggressively, but

the logistics just didn’t work out.”

Part of the problem was that to

maintain the steam pressure required,

the potato processing plant would have

had to be located virtually next door to

the co-generation plant — not exactly

an appetizing prospect for a food factory. Further, there was concern about

how long the coal supply at any one of

these plants would last.

With methane gas, the supply will

last as long as the landfill is in operation, and probably even long

afterwards. So, the co-op found 83

acres of land adjacent to a landfill

where a methane-collection system was already in place, but the

gas was just being flared off. A

contract was negotiated with the

CES (Commonwealth Environmental Systems), the private company that operates the landfill, and

the county agreed to sell the adjacent land. Project backers then

went to work to form the LLC

and line up financing.

Stimulating a stagnant economy 

Local government agencies and

the state have backed the Keystone

project both as a way of shoringup the state’s potato industry and

to create industrial jobs in a region

where the coal industry has long

been fading and the garment

industry has almost entirely

migrated overseas. 

But it took several unsuccessful

attempts before a strong enough application and business plan were developed to win a Value-Added Producer

Grant (VAPG) from USDA Rural

Development. The VAPG grant was

considered essential to making the project fly. 

“The second time we failed to get

the USDA grant, our then-state agriculture secretary asked me what kind of

help the state could supply to make it

happen,” Masser recalls. “I told him we

needed about $50,000 to hire someone

who could work for a year to develop a

really strong application.” The state

Rural Cooperatives / January/February 2006 5

Potatoes are steamed during the dehydration process at

the new Keystone Potato plant near Hegins, Pa., which

uses power from methane gas piped in from a nearby

landfill. USDA photo by Dan Campbell; Facing page: photo courtesy U.S. Potato Board 
6 January/February 2006 / Rural Cooperatives

department of agriculture came through

with that grant, and Schlegel — a manufacturing-process engineer and a

home-town boy — was hired away from

Alcoa Aluminum to go to work on the

application package. 

In 2001, the revised application —

predicated on the use of methane gas to

power the plant — was approved by

USDA, and Keystone was awarded a

$450,000 VAPG. As a matching grant,

Keystone members had to put up a like

amount of equity. The money was used

for everything from attorney fees to

incorporate the business to start-up

capital. Another huge boost

came in the form of a $1 million grant from Pennsylvania

for an on-site wastewater

treatment plant (the grant was

actually awarded to an intermediary, which in turn is

leasing the treatment plant to

Keystone). A well was drilled

for an on-site water supply. 

The state also kicked in

with $1.75 million in lowinterest loans for machinery,

land and the building. Keystone borrowed $5 million

from a local bank, with the rest

of the money coming from

member equity investment. 

Higher-value products eyed

Schlegel says he hopes to produce 8

to 10 million pounds of dehydrated

potato flakes this year, and to double

that amount within the next couple of

years. Most of the plant’s initial sales

are being made to buyers who repackage Keystone’s product into smaller

packages and sell it under various private labels. 

The extremely depressed potato

prices in recent years (although 2005

saw some improvements) resulted in big

carryover inventories of dehydrated

potatoes, which has put a damper on

flake prices. 

Keystone is targeting the food-ingredients industry, where dehydrated potatoes can be used for just about anything,

from breads and rolls to ice cream. The

ultimate goal is to expand production

into higher-profit-margin foods, such as

fresh-cut French fries. Masser says it

doesn’t take an economic genius to see

why: it takes six pounds of raw potatoes

to make one pound of dehydrated flakes

that sell for 40 cents a pound, whereas

one pound of fresh potatoes can nearly

yield one pound of French fries that sell

for 50 cents a pound. 

Keystone is working with the

National Agri-Marketing Association at

Penn State University to identify the

most promising value-added products

to pursue. About 10,000 square feet in

the plant has been allocated for producing such products.

The plant’s business plan calls for

pulling raw product from a 600-mile

radius, although sky-high fuel and

trucking costs have currently shrunk

that radius, says Schlegel. The rise in

fuel prices actually costs Keystone’s

competitors in the West far more. “A

fuel increase that costs us an extra 1-2

cents per pound will cost them 7-8

cents per pound,” Schlegel says. 

In addition to off-grade fresh-market

potatoes (usually kept off the fresh market due to small size or superficial blemishes), another source of raw supply is

Pennsylvania’s large potato chip industry. The state is home to about a dozen

major and minor chip fryers, and those

plants frequently reject loads that arrive

with a flesh color that will not fry to the

food-maker’s specifications. As with the

other off-grade potatoes, these are perfectly good spuds, just not quite what

the potato chip makers require. But

Schlegel says they work fine for him. 

Shake-down cruise

Like most new plant start-ups, there

have been a number of bumps in the

road and a learning curve to master

during the plant’s start-up cruise,

Schlegel says. The plant began operating in mid-May, but it took most of the

summer to prefect the process to produce a superior product. 

“This is a unique operation for this part of the

country,” Schlegel says. “We

couldn’t just run around the

corner for answers every

time we ran into a problem.”

The equipment supplier,

Idaho Steel Products, has

been a big help, as has been

the ability to consult with

others who had experience

in potato processing, says

Schlegel. 

“I thought the learning

curve would be shorter than

it was,” Masser says. “But

by mid-September, we had

pretty well learned how to

dehydrate our type of potatoes. Out West, they are

doing mostly Russet Burbanks, with

high solids content.” But that’s not a

variety Keystone handles very often.

“We struggled with the process after

the blanching and cooling. But we kept

at it, and developed a formula that

reconstitutes and tastes better than the

product of our competitors.” 

“It’s not as simple as cooking a potato,

peeling it and drying it,” Schlegel adds.

“There are many little things to watch to

get the right time, temperature and consistency. But we’ve made huge progress.”

The landfill-gas component has been

the most complex and challenging part

of the start-up project, Schlegel says.

“It’s a custom, hybrid system — not off

the shelf. Everything had to be designed

and engineered from scratch. So we’ve

had bugs to work out.”

Eye to eye: Cory Schlegel samples a delivery of new spuds. Perfectly

good, but off-grade, potatoes that were once used for livestock feed

in eastern Pennsylvania can now be processed into value-added

foods. USDA photos by Dan Campbell
Coal mining (such as this operation near Hegins) and textiles once dominated the region’s economy, but have been

on a decline, making it crucial to preserve the area’s agricultural base, co-op members say. Inset (above): a country

church is neighbor to the Sterman-Masser potato packing

plant. Inset (below): the main street in Hegins.
For the first year, the plant is operating every other week, running 24 hours

a day with two 12-hour shifts. That

means that the work is half-time for the

20 hourly workers (there are also five

full-time managers). That has made it

difficult to retain workers. 

A major warehouse distribution center has been developed about 10 miles

north of the plant, which is proving to

be a major source of competition for

hourly workers. When the plant converts to a full-time schedule, it should

greatly help with the labor issues,

Schlegel notes. 

He works closely with the co-op to

order supplies needed to keep the

plant running at optimum level. To

help the plant succeed, co-op members

have been willing to sell product to the

plant for less than they can get elsewhere. 

High fuel/shipping costs is a major

reason for a regional supply close to the

major markets of the Northeast, Masser

says. He notes that it costs about $9.50

per hundredweight to ship potatoes

from the Northwest to the East Coast.

“But we can grow them here for $8 per

hundredweight — less than the cost of

the freight. It wouldn’t make sense to 

lose production here.” 

■

8 January/February 2006 / Rural Cooperatives

The potato may be America’s favorite vegetable, but it

has had to scrap a bit more in recent years to maintain that

status, due in part to the popularity of the Atkins and South

Beach diets, which make scant use of the tuber. 

Keith Masser, president of the Pennsylvania Cooperative Potato Growers, says he believes the impact of

those diet crazes on the market has already largely passed. But he sees a much bigger challenge

for the industry in the ever-increasing trend

toward consumption of convenience foods

that can be prepared in a hurry — never the

strong point of the potato, although considerable product development is taking place to

address that demand. 

Helping the industry spread messages

about the nutrition of the potato is the United

States Potato Board (USPB), established in 1971

by a group of potato growers to promote the benefits of eating potatoes. Today, this cooperative

industry effort represents 6,000 potato growers and

handlers across the nation. Recognized as an innovator in

the produce marketing industry, the Denver-based USPB

was one of the first commodity groups to promote its product generically and to develop a nutrition label approved by

the USDA and FDA. 

USPB is funded through a small assessment on grower

production, which generates around $9 million annually. 

USPB recently acquired the services of a celebrity

spokesman — or spokespud — who is playing an important

role in helping to educate children about potatoes: Mr.

Potato Head. Yes, the venerable, ever-flexible, face-changing toy that has entertained children for more than half a

century is helping kids learn that potatoes are an important

part of a healthy, balanced diet. 

Through nutritional education programs such

as this, consumer public relations and retail

programs, foodservice marketing and export

programs, USPB strives to educate consumers, retailers and culinary professionals about the convenience, good nutrition

and versatility of potatoes.

“The potato is a nutritional powerhouse, loaded with fiber and essential

vitamins and minerals,” says USPB Chairman Ray Meiggs of Camden, N.C. He notes

that a 5.3 ounce potato is a great source of

vitamin C; is an excellent source of potassium

when eaten with the skin; contains only 100

calories; has less than 10 percent of the daily value

of carbohydrates and is a good source of fiber when eaten

with the skin.

As evidence that the industry’s Healthy Potato Campaign

is having an impact, USPB cites a recent survey showing

that 4 percent more consumers in 2005 agreed that “potatoes are a good food for the health of consumers” than in

2004. There was a like increase from 2004 to 2005 in the

number of consumers who reported serving potatoes at

home the previous week. ■

USPB promotion effort enlists celebrity spokespud
By Bruce Pleasant 

Business Programs Specialist

USDA Rural Development/North

Carolina 

efore Prohibition in the

1920s, North Carolina

was the nation’s leading

wine-producing state,

with Muscadine and

Scuppernong wines dominating its

industry. But that all changed with

Prohibition, which lasted longer in the

South than in most other parts of the

nation. Combined with low prices for

table grapes, most vines were ripped out

or left to die, says Margo Knight, executive director of the North Carolina

Wine and Grape Council.

While California’s wine crown is in

no danger of being lost, winegrowing is

steadily making a comeback in North

Carolina, which currently ranks 12th

among the states for wine production.

Interest in wine grapes has been fueled

in part by declines in the state’s textile,

tobacco and furniture industries, which

once dominated the region’s economy. 

Data compiled in 2003 indicates that

1,000 jobs and $84 million are directly

related to wine production in North

Carolina. While the ultimate economic

impact wine has on the state’s economy

has not been determined, Knight

believes that it is significantly higher

than the $84 million estimate. A new

study has been commissioned to measure the economic impact with certainty,

which should be completed this April.

Old

North

State

Winegrowers

Cooperative

Association

(ONSW) in Mt. Airy,

N.C., was incorporated in 2001, and is

currently the only co-op among the

state’s 52 wineries. When ONSW started, there were only 22 wineries, which

provides some idea of the burgeoning

wine industry in North Carolina. 

Cooperative members have pooled

resources to take advantage of

economies of scale and marketing

opportunities not available to small

independent growers. ONSW has

members from nine counties, so the

Fruits of Their Labor

Co-op winegrowing takes root in North Carolina 

B

Rural Cooperatives / January/February 2006 9

Wine ages in the barrel room of

the Old North State Winegrowers

Cooperative Association (ONSW)

in Mt. Airy, N.C. Wine production

is steadily making a comeback in

the state, contributing $84 million

to its economy in 2003. USDA

photo by Bruce Pleasant; grape photo

courtesy Shelton Vinyards
impact of the winery reaches at least as

far as their member vineyards. 

Look for the co-op label

When ONSW bottled its first wine,

the label chosen by the co-op was

“Carolina Harvest,” reflecting the pride

the members had in North Carolinagrown wine. After a year of marketing

the brand, the co-op made a bold move

by changing its brand to “38 Vines” for

its 38 charter members. 

The label change was suggested by a

team of MBA students at Wake Forest

Babcock School of Management to

make the wine appealing to out-of-state

markets. Each bottle now tells the story

of the cooperative and explains the significance of the brand name. 

The Wake Forest MBA students

were the winning team responsible for

developing a new marketing plan for

the cooperative winery. 

“It was the best thing that happened,

and it was the worst thing that happened to us,” says Gray Draughn, president and general manager of the cooperative. After a year of marketing, they

had to start from scratch to gain brand

recognition. However, as they have

expanded, the co-op’s new brand has

gained recognition. This year, the coop’s Chardonnay took a double gold

medal in the state fair wine competition.

Capitalization and growing pains

Managing growth can be a welcome

problem to have, but it has also caused

some pitfalls for the ONSW cooperative. One of the biggest challenges the

cooperative has faced has been raising

capital. 

Most members are small producers

who must make substantial up-front

investment in their vineyards, with a 2-

to 3-year waiting period before generating any income from a harvest, says

Doug Thomas, treasurer of the

Winegrowers Association. “As a result,

the membership is limited as to how

much additional capital it has to invest

into the cooperative.”

The cooperative structure has been

both an impediment and an avenue for

financing their facility and operations.

Cooperative members have one vote

regardless of vineyard size. To meet the

need for more capital, the members

voted to assess themselves each $7,500.

In addition, each member pays a fee of

$1 per vine, with a 250-vine minimum.

The vineyards range in size from 250 to

6,500 vines, which represents from

about 1/3 to 10 acres. There are about

54,000 vines planted by cooperative

members. 

The cooperative did not have a sales

staff that could service a wide geographic area, so it contracted with a wine distributor to expand its market. Expanding the markets and distribution of the

“38 Vines” brand into new geographic

markets is essential, given the number

of wineries in the Yadkin Valley region,

according to Thomas. 

However, their first attempt to

obtain a distributor failed after one

backed out on a deal. At this point, the

co-op was left with excess product that

could not be moved quickly enough to

free capacity. This past year, the cooperative dedicated more capacity to custom crushing for other wineries and for

its members who wanted to bottle wine

under their own labels. 

Growth has outstripped the capacity

to process wine. The inability to take

equity when they leave the cooperative

has hindered member investment. This

has prompted the board to consider

converting from a cooperative status to

a stockholder corporation that would

allow producers to recover their equity

in the entity. However, the board

tabled any proposed entity change, but

will revisit it again in 2006.

Key help from USDA, N.C. 

The cooperative has benefited from

a number of grants. It has used business/cooperative programs of USDA

Rural Development and has obtained

funding from other state and private

Location, location, location

The ONSW winery is located in the heart of downtown Mt. Airy — a

town of about 8,500 in the foothills just south of the Virginia border. It is

not unusual to see tour buses dropping off passengers to visit any number of

places of interest in this tourist-friendly town. 

Mt. Airy is the boyhood home of actor Andy Griffith, and is believed to

be the basis for the fictional town of “Mayberry” from the Andy Griffith TV

show. The “Mayberry” theme and nostalgia are evident all over town. 

Mt. Airy holds two festivals annually: Mayberry Days and Autumn

Leaves. These are two big weekends for the cooperative, as the festivals

draw nearly a quarter of a million visitors to the area. This is in addition to

the 78,000 visitors who signed the guest register at the town’s visitor center

in 2004. 

Located in a three-story, 26,000-square-foot mercantile building constructed in the 1890s, the winery has a “vintage” (no pun intended) look,

with oak floors and decorative tin ceilings. The winery is complete with a

tasting room, gift shop and restaurant. The building is owned by the Old

North State Winegrowers Foundation, a nonprofit organization that leases

the facility to the cooperative.

Don Knotts and Andy Griffith confront town

drunk Otis Campbell. The co-op’s winery is

located in Mt. Airy, the boyhood home of

Griffith and the inspiration for the fictional

town of Mayberry. Photo courtesy TAGSRWC

Archives 

10 January/February 2006 / Rural Cooperatives
foundations as well. To assist with the

renovation of the building, the Old

North State Winegrowers Foundation

received a $200,000 grant from the

Appalachian Regional Commission, a

federal-state partnership. 

In 2002, the town of Mt. Airy

received two $99,000 Rural Business

Enterprise Grants to purchase bottling

equipment and renovate the buildings,

that would in turn be leased to the

cooperative. In 2003, the Winegrowers

Foundation obtained the building with

an $829,000 loan guarantee from

USDA Rural Development through the

North Carolina Agricultural Finance

Authority. NCAFA also provided the

cooperative a $525,000 loan for working capital, which was also guaranteed

by USDA Rural Development. 

In 2004, the co-op’s application for a

zero percent Rural Economic

Development Loan of $210,000 was

selected for funding. However, because

of the liens placed in connection with

the Business and Industry Loan

Guarantees from USDA, the co-op was

unable to use the zero percent interest

loan for start-up expenses, but the

majority of the co-op’s working capital

needs had already been met by the

NCAFA loan. This past September, the

cooperative was awarded a Value-Added

Producer Grant of $150,000 for working

capital to market its wine. This grant

will be used to purchase inventory and

supplies as well as to cover marketing

expenses associated with sales staff salary. 

Member assets

As with most cooperatives, every

member brings something to the table.

Renovating an old building to make it

suitable for a winery and restaurant

required many resources. One member

who is an iron worker furnished the

wrought iron railing and gate for the

tasting room. The decorative railing is

functional as well since alcohol laws

require separation between the tasting

room and other parts of the winery. 

The sprinkler system for the building was provided by a member who has

a fire protection business. Another

member who is a restaurant owner

helped the cooperative purchase “gently

used” restaurant equipment at auction

for about 10 percent of the cost of new

equipment. 

One cooperative member is a musician who has lined up bands for festivals

and events for the winery. Other members volunteer time in the bottling

room or assist with wine tastings in the

tasting room or at festivals. 

While the Old North State

Winegrowers Cooperative winery got

off the ground with help from USDA, 

it has been the members who have volunteered their time and money that will

make this cooperative venture successful. Though the cooperative faces many

of the same, and some unique, challenges as most cooperatives, the cooperative members will continue to pool

their financial and strategic resources to

exploit their strengths in an industry

that has been reborn in North Carolina.

■

Roses planted at the end of each row of vines

aren’t just for looks; they attract the same

pests that attack grapes, and thus serve as a

natural bell-weather. Photo courtesy Shelton

Vineyards 

Expanding the markets and distribution

of the co-op’s “38

Vines” brand into

new geographic

markets is essential. 

Rural Cooperatives / January/February 2006 11
12 January/February 2006 / Rural Cooperatives

By Bruce Pleasant

Editor’s note: Pleasant is a business programs specialist

for USDA Rural Development in North Carolina. 

As with many wineries, the members of the Yadkin

Valley Winegrowers Association (YVWA) in North Carolina

are constantly looking for new ways to add value to their

grapes. The processing of grapes into wine will yield 10

times more than grapes sold in bulk. While that comparison is somewhat misleading (since there is much expense

associated with operating a winery), production of wine

nonetheless results in greater returns to grape growers. 

In 2004, the YVWA received a Value-Added Producer

Grant from USDA Rural Development for working capital to

market wines of member wineries through a retail wine

store at the Charlotte-Douglas International Airport. Buddy

Norwood, YVWA vice president and manager of the Yadkin

Valley Wine Bar, says the store would not have opened

without the $250,000 working capital grant received from

USDA in 2004. The store was only one of two such airport

stores in the country when it opened in March, 2005. 

But the idea is apparently catching on. A wine-tasting

bar has since opened at Virginia’s Dulles Airport in suburban Washington, D.C., and other airports have plans to add

wine-tasting bars. The Wall Street Journal (WSJ) recently

included an article on airport wine sales, which featured

the North Carolina wine bar. “With people spending more

time at airports — Americans took 633 million domestic

trips last year, according to the Bureau of Transportation

Statistics — this gives weary travelers something to do.

It’s a great way to promote local wines,” the WSJ wrote.

“Isn’t everybody always looking for a last-minute present

at the airport? What could be a better and more interesting present than a bottle of local wine?”

The revenues generated at the North Carolina airport

wine bar help support the nine member wineries, including

a cooperatively owned winery with 38 charter members in

some of the most rural counties in the state. The store is

an extension of the tasting rooms of the member wineries,

reaching a customer base that they would never otherwise

tap. 

Supreme Court ruling impacts local wineries

The Yadkin Valley Wine Bar has enjoyed remarkable

success since opening in March of 2005. Visitors from

other states and abroad can taste and purchase Yadkin

Valley Wines and take them

home or send them as gifts. 

In March, the Supreme

Court ruled that it is unconstitutional to prohibit interstate wine shipment to

states that allow wine to be

shipped within their borders.

Since the Supreme Court ruling, the Yadkin Valley Wine

Bar has noticed brisk

increases in out-of-state

shipments. Most go to

Florida or New York because

of their popularity as travel

destinations from the

Charlotte airport. 

However, the ruling did

not necessarily mean that

wine can now be shipped to

all parts of the country. One

state, Louisiana, responded

Yadkin Valley Wine Bar “takes off” at Charlotte airport

The association’s wine bar opened at Charlotte-Douglas International Airport with the help of a

VAPG from USDA Rural Development. USDA photos by Bruce Pleasant 
Rural Cooperatives / January/February 2006 13

to the court ruling by enacting legislation to prohibit

intrastate shipping previously permitted, effectively blocking the shipment of wine into the state. Of the remaining

states, only nine do not allow interstate wine shipments,

primarily because they do not permit any wine shipping at

all. 

Ultimately, the Supreme Court decision should open

new markets for North Carolina wineries. 

More incremental returns for producers

Wine bar traffic is directly proportional to the traffic in

the airport, Norwood says, with afternoons on Wednesday

through Friday being the busiest time. The store also does

good business with vacation travelers on Saturdays. 

The wine bar is on track to sell over 13,000 bottles this

year. Norwood says, “it’s remarkable how close we have

come to our sales projections.” The average price per bottle

is actually $3 higher than projected, due to the number of

tastings sold and the amount

of wine sold by the glass. The

average bottle of wine sells

for around $15. Tastings generate $18 per bottle while

wine sold by the glass generates $23 per bottle.

The requirements of the

store are minimal. At 600

square feet of retail space,

the $400 per-square-foot

annualized sales compare

favorably with the $300-$400

average for most retailers at

the airport. Typically, most

travelers expect to pay more

for food and other items within an airport. 

However, the prices of

members’ wine are the same

as they are in a grocery store

or at the winery. Visitors to the Yadkin Valley Wine Bar may

be greeted by a winemaker or owner of any one of the nine

member wineries, each of whom work about 2 days per

month at the airport store. These representatives provide

an enormous amount of goodwill in addition to staffing for

the store, Norwood says. Their presence at the wine bar

usually results in a spike of their own label. “If a customer

asks for a recommendation of a good Chardonnay, they are

expected to push their own,” Norwood notes. 

Yadkin Valley wine designation 

California has its Napa Valley, but North Carolina has its

Yadkin Valley, thanks to a new designation that recognizes

the unique climate and soils of the valley that are beneficial to growing wine grapes. This designation was granted

in February 2003 by the Treasury Department’s Alcohol and

Tobacco Tax and Trade Bureau, a process that took 2

years.

With the designation, all wines marketed as Yadkin

Valley wines must contain 85 percent grapes grown in the

Yadkin Valley region. This designation is important to area

wineries because it creates interest and helps establish

the region as a wine destination. 

Margo Knight, executive director North Carolina Wine

and Grape Council, says having that designation is a key

point in the growth of the state’s wine industry because it

helps develop a “sense of place” for wines of the region.

Unlike wineries scattered across a wide area, a number of

wineries in an area encourages tourism. 

“Then it becomes a critical mass,” according to Knight.

Many will make a day trip to visit several wineries but

would not travel to visit just

one. While applications for

other designations are in

process, Yadkin Valley is

currently the only designated appellation in the state. 

In addition to becoming

acquainted to Yadkin Valley

wines, visitors to the

“Yadkin Valley Wine Bar”

can receive complimentary

passes for tours and tastings at member wineries.

Visitors can also obtain

maps and brochures that

will direct them to each of

the wineries in the Yadkin

Valley. 

Value of VAPGs 

While the airport store

still is a relatively fresh concept, it appears to have been

very successful for the YVWA. The airport wine bar is a

good example of how, through the assistance of a USDA

Value-Added Producer Grant, agricultural producers were

able to start a new venture that would not have been possible otherwise. 

“The Value-Added Grant Program helps North Carolina

farmers transition from tobacco and other crops to grapes

which yield a greater return per acre,” says John Cooper,

state director for USDA Rural Development in North

Carolina. “I look for this venture to be the start of a trend

which will “take off” at airports across the country.” 

■

The airport wine bar sold about 13,000 bottles of wine last year.

The average price per bottle was $3 higher than projected,

reflecting the higher price paid for wine ordered by the glass

or for tasting. 
By Scott A.Yates

Editor’s note: this article is reprinted courtesy the Capital Press,

which covers agriculture in California and the Northwest United

States. Yates is that publication’s Washington state staff writer. He

can be contacted at: syates@capitalpress.com.

he question itself was revealing, but according to

Dennis Bolling, the answer is: “Yes, cooperatives

do have a future.”

Speaking at the Joint Northwest Co-op

Council’s annual meeting in Post Falls, Idaho,

the president and chief executive officer of United Producers

with headquarters in Columbus, Ohio, said anybody wanting

to investigate the future of cooperatives should think about

shutting down. That’s what happened to his company.

“If your co-op closed tomorrow, would your members start

it up again?” he asked the roomful of cooperative directors and

managers.

He related the saga of the Midwest livestock cooperative

that got caught in a ponzi (pyramid) scheme, which resulted in

$140 million worth of damages. The house of cards involved

individuals showing banks duplicate cattle inventory as part of

receiving financing.

Two banks lost over $50 million. The cooperative lost $12

million. And that doesn’t count the “boatload” spent on attorneys during litigation.

“We were rocking and rolling with litigation,” Bolling said.

“I was a little overwhelmed when I came on the board. How

do you think directors of ours felt? ‘And, oh, by the way, here’s

the 50 pounds of legal stuff I have to go through with you.’” 

That “legal stuff” will increasingly be part of the future of

cooperatives. That means directors will increasingly be

responsible for ensuring due diligence was performed “when it

hits the fan.”

And don’t think it can’t happen to you, Bolling told the

group. It’s a myth to think that what happened to United

Producers couldn’t happen to any cooperative out there. “We

are a litigious society... [but] it is not just a matter of being

sued. It is a matter of positioning for the future,” he said.

Bolling has taken a business lemon and turned it into

lemonade by helping the directors understand what is necessary to survive. The future, Bolling said, is a fast-paced one

that has agricultural commodities dealing with the leading

edge of science over problems like BSE, bird flu and other

phytosanitary issues.

And that doesn’t even address the question of getting bigger, which he said shouldn’t be confused with needing to grow.

“We simply had to handle more widgets. We couldn’t stay

competitive if we didn’t grow,” he said.

But for the farmers his cooperative serves, the real value to

the operation, as revealed in a survey, was the company’s presence in the marketplace.

“Which is a good thing, because the equity is gone,” he

said, referring to the bankruptcy loss.

“Co-ops can’t be hobbies, habits or the Church in

Wildwood,” Bolling wrote on one of his power point displays.

14 January/February 2006 / Rural Cooperatives

Editor’s note: this backgrounder supplied courtesy United Producers.

United Producers Inc. (UPI), originally formed in the

1930s, is a multi-state livestock marketing, lending and

related services cooperative headquartered in Columbus,

Ohio, governed by a 17-member board. UPI currently serves

over 70,000 patrons in about a dozen Midwest states. 

In 2001, UPI was victimized, along with several banks,

cattle producers and agri-businesses, by a third-party cattle-fraud situation. The perpetrators are serving time in federal prison. UPI suffered significant losses coupled with

legal expenses from related litigation.

UPI filed for Chapter 11 on April 1, 2005, to reorganize its

business and have a forum to ultimately deal with the litigation. Subsequently, in early October of 2005, UPI’s Plan of

Reorganization was confirmed by the Court. CoBank continues to provide financing for the cooperative’s operations. 

UPI’s core business continued intact during this timeframe. UPI markets nearly 4 million head of livestock and

has a loan portfolio of over $50 million. Sales volume

approaches $1 billion. Additionally, risk management and

production coordination, including a Managed Beef

Alliance, are provided to the cooperative’s membership.

Co-op progressing 

under Chapter 11

Voice of experience:

co-ops are resilient

T
A model created in the 1930s, it

largely went on the same way for 65

years. Only recently have co-ops

been forced to adapt for the 21st century.

Bolling said it would be a mistake

to think the cooperative structure

isn’t alive and well. Farmers are

forming co-ops right and left, which

suggests the model is healthy. In

Ohio, four new livestock cooperatives

were formed recently.

“We are feeling pretty happy

because we are the big fish, but

farmers have formed these related

co-ops because they are dealing with

issues or needs we weren’t addressing,” he reminded co-op managers

and directors.

In addition to dealing with the

producer, the input provider, the

slaughterhouse, the wholesaler and

the retailer, today’s cooperative has to

address the consumer, who is king.

“The challenge for us is how do

we connect the farmer further up the

food chain,” Bolling said.

Although farmers can accomplish a

lot on their own, he said, a cooperative can effect more change. But coops of the future will need market

position, financial capital and leadership to compete. “We are going to

have to address economic performance, structural alternatives and intentional leadership,” he said. 

In the process, it’s likely co-ops

will have to change entrenched policies. For instance, 5 years ago, the

United Producers board would have

reacted in horror to the idea of entering into a formal supply agreement

with a packer. Now it has one.

“We’re competing on a much different plane. Our competition is not

other co-ops like us,” Bolling said.

“In reality, our competition is our

customer, the packing companies.” ■

Rural Cooperatives / January/February 2006 15

Sam Roberts, beef technologies coordinator for

United Producers Inc., applies a new electronic

identification ear tag designed to track cattle

back to their place of origin. Photo courtesy United

Producers

Leaders evaluate risks of serving

Listening to speakers at the Joint Co-op Council Annual

Meeting and Educational Seminar talk about the obligations

faced by directors of modern farming cooperatives raises

questions about why they serve.

Talk to a few directors from various boards and one of

the first things they mention is the obligation to give back to

the community. For many, it is a responsibility that has been

passed from parent to child.

But to paraphrase an automobile ad of the 1990s, this

isn’t your father’s cooperative. Once a quiet backwater of

American business, co-ops are finding themselves on the

cutting edge of finance, science and society. More is

expected of directors, and more risk is involved.

Hence the need for educational meetings where directors learn that litigation is only a lawsuit away. Mark Hanson, a lawyer for Lindquist & Vennum in Minneapolis, which

works with cooperatives, agreed agriculture is more litigious nowadays, but still much less than any other sector of

the economy.

“I think, unfortunately, the rural lawyers have changed.

They are more willing to sue,” Hanson said. 

So is serving on a board worth taking the risk? Wade

McClean of Co-op Supply Inc. in Northern Idaho said you

owe it to the community to help out.

Donald Heikkila, on the Co-op Supply Board in Northern

Idaho, said it’s all about being able to sleep at night.

“I’m not so much concerned about personal liability. All

the decisions we make are based on good, sound judgment,

and I think we all have a clear conscience that our vote is

not only in the best interests of the cooperative, but of its

members,” said the 25-year veteran.

Tim Butler, on the Wilco Board in the Willamette Valley,

said as owners of the company, it’s important to be involved

in the company. Sure, litigation is possible, he said, but

“Board members have made those decisions before me,

and now it’s my turn to make those decisions, and in 5 or 10

years, it will be somebody else making the decisions. It has

to be done.”

Besides, said Bud Dyk, on the board of Midstate Cooperative in Ellensburg, Wash., it’s important to know how a

cooperative actually operates. He said he was pretty

naive when he first became a director and called his 9

years on the board a good challenge. Some risks are

worth taking.

“I always wanted to give back, and this is one way to do

it. Yes, there is a risk, but you have to weigh it with what

you’re doing,” he said. ■

— Scott A. Yates, Capital Press
By Dan Campbell, Editor 

ow important are the

World Trade

Organization talks for

U.S. dairy cooperatives

and their members?

“Either we have a place at the table, or

we’ll be on the menu,” is how Jerry

Kozak, CEO of the National Milk

Producers Federation (NMPF), put it

in his address to the joint annual meeting of NMPF, the United Dairy

Industry Association and National

Dairy Promotion and Research Board

in December. 

NMPF lobbying efforts have been

based on the stance that there can be no

dairy trade deal if the European Union

makes only incremental cuts in its subsidies and import tariffs, which are

much higher than those in the United

States, he stressed. Still, the industry’s

very willingness to even discuss possible

reductions in a 50-year-old support

program — under which the U.S. government pays more than $4 billion

annually to support the dairy industry

— represents something of a shift

toward greater flexibility on free trade. 

And how much is at stake for producers as the 2007 Farm Bill takes

shape? “Either we get our ducks in a

row, or we’ll be sitting ducks,” Kozak

warned, noting that agriculture is bracing for farm program reductions and

that the dairy industry needs to be united and proactive to keep the budget ax

from swinging its way.

Environmental issues — including

potentially stricter air and water quality

controls — will play a part in the Farm

Bill debate, Kozak said. Food security

and the war on terrorism, animal welfare and product standards and labeling

will also be in the mix more so than in

past Farm Bills.

Another fundamental challenge facing producers comes from “people outside the industry who would like to dismantle the cooperative business structure,” he said. This would have

“extremely serious consequences for

farmers and the industry,” Kozak continued. “Now is the time to rally

around the cooperative structure and

take advantage of the magic of cooperatives and the Capper-Volstead Act. We

need to take advantage of cooperative

unity for the benefit of all producers.”

CWT & market gains

As sobering as those thoughts were

for the 1,100 or so producers and guests

gathered at the meeting in San

Francisco, there were also many

achievements in 2005 to look back on

and cheer. After three successful bidding rounds of the CWT (Cooperatives

Working Together) program, 74 percent of the nation’s milk production is

enrolled in this industry self-help effort

to stabilize on-farm milk prices by better balancing supply and demand. In

2006, the CWT focus will likely shift

from voluntary herd reductions to

boosting the export-enhancement component of the program, Kozak noted.

NMPF Board Chairman Charles

Beckendorf said the 5 cents per hundredweight producers contribute (on a

voluntary basis) toward the CWT program is “the best nickel you could ever

spend.” Last year, CWT removed 900

million pounds of excess milk from the

market, he noted. 

Dairy Management Inc. CEO

Thomas Gallagher recounted gains in

dairy research and promotion, many of

which were achieved through invest16 January/February 2006 / Rural Cooperatives

H

Jerry Kozak, left, and the senior staff of the National Milk Producers Federation (NMPF), hosted

a lively “town hall” meeting, during which producers could quiz them about any NMPF program. USDA photos by Dan Campbell

Trade, Farm Bill, co-op structure

challenges eyed at dairy conference 
ment of producers’ Dairy Checkoff dollars. Topping the good news on the

nutrition front was the revised U.S.

Dietary Guidelines, which keep dairy as

its own food group and boosts the recommendation from twice-daily to

thrice-daily consumption of dairy foods

for adults and children.

Yogurt was the retail star for the

industry in 2005, with sales that

climbed 6 percent, to 2.87 million

pounds, and is becoming “a ‘growth

engine’ for the industry,” Gallagher

said.

The big news for fluid milk consumption continues to be sales gains in

schools and fast food outlets, achieved

primarily by replacing cardboard milk

cartons with flavored milk in singleserve, plastic bottles. Indeed, several

times during the meeting, the image of

the single-serve, cardboard milk carton

was flashed onto video screens as a symbol of an industry that in the past was

sometimes too slow to adapt to modern

By Dan Campbell, Editor

When Jason VanderKooy left his dairy farm near Mount Vernon, Wash., in late

November and headed to San Francisco for the joint annual meeting of three

major dairy organizations, he went expecting to learn more about the state of the

industry and what is being done to strengthen it. But one thing VanderKooy never

expected was to wind up in the hammerlock of Olympic gold medal Greco-Roman

wrestling champion Rulon Gardner. 

Yet there he was, up on stage in front of 1,100 producer delegates, nose-tonose with Gardner as the champ demonstrated the techniques he used to defeat

Russia’s supposedly invincible Aleksandr Karelin. It’s been called “the miracle on

the mat,” and some sportswriters consider Gardner’s victory the greatest upset in

Olympic history.

Karelin had easily defeated Gardner in a prior match in 1997, throwing Gardner

to the mat three times — including a head-first landing which caused a spinal

crack (diagnosed years later). Gardner said it seemed everyone in Sydney, Australia, wanted to see the legendary Russian win again — the crowd, the sponsors

and even the officials. But as he has on so many other occasions in life, Gardner

fooled the odds makers, who had made him as much as a 2,000-1 underdog. He

did so by drawing on the qualities

that got him into the Olympics: perseverance, dedication, determination and heart. Gardner said he also

used some of the techniques dairy

farmers must master “to make cows

do what you want them to do, not

what they want to do.”

So was VanderKooy scared up

there in the vice-like grip of the

champ?

“Nah, Rulon is really just a big

teddy bear,” said VanderKooy, safely

back home on the 1,000-cow dairy

farm he operates with his brother

and father. After all, when you make your living herding 1,200-pound Holsteins

around your farm, doing mock battle with a 265-pound wrestling champ seems

almost tame!

VanderKooy, 30 and a member of the Northwest Dairy Association cooperative,

says his wife, Shelby, volunteered him for the “match” by grabbing his arm and

hoisting it in the air when Gardner asked for someone to help him demonstrate

how he achieved his impossible dream. VanderKooy says Gardner’s message —

about never giving up even when the odds are stacked against you — resonates

with producers who know that feeling all too well.

“We’re facing more pressure all the time on our farm from environmental regulations, urban growth and rising energy prices and costs in general that just keep

going up,” says VanderKooy, who farms 1,000 acres of corn, alfalfa and grass in

addition to milking his herd three times daily. “We just have to keep looking for

ways to get better.”

Rural Cooperatives / January/February 2006 17

A Grip on Success

Gardner recalls odyssey from ‘failure’ to gold medal victor

continued on page 18

Washington state dairyman Jason

VanderKooy, left, was “volunteered” to

serve as Olympic champion Rulon

Gardner’s wrestling foe.
consumer food preferences, nearly costing the industry a generation of milk

drinkers.

Halting slide of fluid sales 

Gallagher said fluid milk sales have

been in a 21-year downward slide.

Why? “Decades of offering milk in

cardboard boxes that kids needed a fork

to open.” He disagreed strongly with

those who say the best the industry can

hope for is to halt or slow the slide, and

he predicted that with the right products, fluid milk can once again become

a “shining star” of market growth for

dairy producers. 

Need evidence? Dairy producer

investments in foodservice and school

partnerships have led to the introduction of milk in plastic bottles at

McDonald’s and Wendy’s restaurants

across the country, and milk in plastic

bottles in 3,500 schools today, compared to just 400 schools during the

2003-04 school year. Based on incremental sales increases, if milk in plastic

bottles were offered in all schools and

major fast food chains nationwide, sales

could increase by an additional 1 billion

pounds — a 1-percent increase in per

“One of us”

Many farm conferences include an inspirational speaker

on their agenda, and Gardner filled that role at the joint

meeting of the National Milk Producers Federation, United

Dairy Industry Association and the National Dairy Promotion

and Research Board. As a farm boy who grew up on a

Wyoming dairy, Gardner knows well the daily battles farmers face, and the strength they draw from rural values and

work ethic. 

Building hay stacks and shoveling manure taught him

hard work and discipline, he said, recalling how he worked

until midnight during sweltering summers and milked cows in

frigid winter temperatures after the family’s barn burned

down. His upbringing also taught him the value of family and

neighborliness, such as when his family’s neighbors all

pitched in to harvest the Gardners’ barley crop so that they

could watch him wrestle in the Olympics.

“He’s one of us,” one delegate was heard to remark.

Despite being somewhat hoarse from shouting a day

before at a wrestling event where he had coached, Gardner

recounted what it was like growing up with learning disabilities that put him in special education courses where it sometimes seemed as if he was expected to fail. “I’d get pulled out

of class every day and fall further behind. My family helped

me deal with the frustration — they showed me that I could

be successful if I gave 100 percent.” When school counselors said he could never go to college, his mother responded: “how dare you limit my son’s potential” and refused to

take their advice, he recalled.

Other kids would make fun of Gardner for being a poor

reader and slow to learn in other subjects. After he won the

gold medal, many of them who had treated him so cruelly

said they were sorry. “Why did you do it? You could have

destroyed me,” Gardner said. But he instead used those

jeers to motivate himself to success.

Gardner says his wrestling skills were developed with a

large measure of help from the Sunkist Kids Wrestling Club,

founded by Arizona citrus grower Art Mortori, who named

the club after the Sunkist Growers citrus co-op, of which he

is a member. Sunkist Growers has been a regular contributor

to the youth program, which has produced more than 150

wrestlers who have earned spots on U.S. World and Olympic

wrestling teams since 1976. 

Against all odds

Gardner made it to a small college, majoring in dairy management, and later transferred to the University of Nebraska,

where he earned a teaching degree in physical education. He

had been told he didn’t have the stuff needed to get an education degree from a major university, especially one like U.N.

where the academic requirements for teaching majors are rigorous. But he worked with tutors daily and continued to wrestle, winning his biggest match of all: for his college degree.

He was also told he’d never land a spot on the Olympic

team, and would certainly never earn a medal. But the

naysayers learned just how wrong they were when the big

farm kid so few had believed in was standing up on the block,

the gold medal gleaming around his neck as the Star Spangled Banner boomed across the public address system.

Gardner’s time to bask in the glory was almost cut tragically short, when he was lost and nearly died in a blizzard

while back home on the farm. He followed a frozen river and

sheltered between two boulders, where he survived 18 hours

at 25 degrees below zero. His body temperature dropped so

low that the emergency medical technicians who treated him

said there was no way he should have lived through the

ordeal. Gardner lost the middle toe of his right foot to frostbite, but managed to come back again to compete in the 2004

Olympics in Athens, where he took home the bronze medal. 

Gardner offered these tips for success from his own life

experience that he believes can

help most people, regardless of

their specific circumstances:

• get back to the basics;

• turn negatives into positives;

• enlist the help of others;

• train hard every day;

• always take care of business;

• aim even higher after a crisis;

• don’t rest on your laurels.

■

18 January/February 2006 / Rural Cooperatives

A Grip on Success continued from page 17
capita fluid milk consumption. 

That trend could pick up steam as the nation’s two softdrink giants — Coke and Pepsi — edge more into the dairy

sector, with products such as Bravo Milk Slammer. To consider the potential impact on sales, Gallagher noted that

Coke has a fleet of trucks second in number only to United

Parcel Service that deliver products daily nationwide. They

also maintain more than 2 million vending machines that can

sell milk. The industry’s hope, of course, is that those types of

products take market share from soft dinks, not from traditional milk products. 

Dairy producers need to keep pursuing strategic partnerships with suppliers, manufacturers and the food service

industry, Gallagher said. Retail cheese sales, which for many

years have driven dairy industry market

gains, were flat last year. This could be a

prime area where producer/processor

partnerships could help spread the risk

for developing new products, such as

snack cheeses and cheeses for the

Hispanic market, he noted. 

Looking at the dairy ingredients market, there is no bigger need than for a

worldwide research and promotion effort

to develop nutritional information for

dairy whey that will help marketers better compete with soy-based food additives, he said. 

Sending large volumes of milk to balancing plants to “turn into powder for

the government to buy, then dump on

the market is not growing the business,”

Gallagher said. 

Innovation and passion 

critical for cheese gains 

Lou Gentine, CEO and chairman of

the family-owned Sargento Foods in

Wisconsin, told how the small company

his father started in 1953 to fill a market void for consumersize packages of Italian cheeses grew into a company that

today annually sells 3 billion pounds of cheese worth $550

million — 3 percent of the U.S. retail cheese market. To put

it in farmer-friendly terms: it takes the milk from 160,000

cows each year to supply the raw product for Sargento

cheeses, he said. 

Sargento cheeses are produced at four plants in Wisconsin

that employ 1,200 workers. One reason for the firm’s rapid

growth was good timing: Sargento went into business just as

the market for pizza and some other Italian foods began to

soar. But its success is also due to the innovation and passion

his family and its employees have for producing cheese,

Gentine said. Among the elements of the company’s statement of values is to: “Hire good people and treat them like

family.” 

U.S. cheese sales have grown 300 percent since 1953, far

out-shining stagnant or falling fluid milk sales during most of

those years, he said. However, since is takes 10 pounds of

milk to make one pound of cheese, that has not necessarily

been a bad trend for dairy producers, Gentine said. 

He sees cheese and yogurt as providing the biggest opportunities for dairy sales growth, and urged producers to “ride

the winner,” saying their research dollars should be invested

in developing new cheese products. 

But innovation is not cheap, Gentine stressed. He

described a process that involves consumer surveys, concept

development and testing, product development and further

testing, building or adapting plants and equipment and costly

product launches (including advertising, promotion and slotting fees). Total costs can run from $10 million to $40 million

to launch a new food product, “and there is no guarantee of

success.”

Gentine said he thinks branded advertising does more for

the industry than generic advertising, saying generic ads are

based on convincing consumers that all cheddar cheese (for

example) is the same, which means they compete only on

price, and that tends to drive the market down. 

He urged producers “to support innovation” and to consider increasing fees for the Dairy Checkoff program (no

such proposal is currently being pursued by the industry).

Asked if he would also support a Cheese Checkoff for processors to pay, Gentine said his company already spends 20 to 25

percent of its income on innovation and promotion. “When

we build our own brand, we also build the dairy industry.”

Rural Cooperatives / January/February 2006 19

With a reduced-scale Golden Gate Bridge as a backdrop, NMPF staff fielded questions

ranging from the workings of the CWT program to the outlook for the 2007 Farm Bill. 

continued on page 45
By Stephen Thompson, Assistant Editor 

ike other markets, agricultural trade is

becoming increasingly international.

Hence, dealing with the globalization

of agricultural commerce was the

theme of the 2005 Annual Farmer

Cooperatives Conference, held Nov. 7 and 8 in

Minneapolis.

As barriers to international trade, capital flow and

communication come down, U.S. cooperatives today

are facing up to the necessity of building business

relationships outside of our borders to remain competitive. Presenters at the conference, sponsored by

the University of Wisconsin Center for

Cooperatives, offered hope and useful suggestions

for participating in the international business arena.

But none of them said that doing so will be easy. 

Participants may have felt that they left the gathering with more questions than answers; the picture

they were presented was one of increasing change —

offering new opportunities, but also greater risk and

uncertainty.

Now what?

Terry N. Barr, chief economist with the National

Council of Farmer Cooperatives, presented co-op

leaders with this question: “The market in which

you had prepared to compete no longer exists! Now

what?”

Barr argued that world markets are changing

quickly and drastically, that “the rise of China and

India is the most important economic force in the

world,” and that the continued growth of those

countries will result in massive changes to the world

economy. He said that customers are taking advantage of increasing competition to demand more

services and better quality. Lower transportation

costs and increasingly efficient communications are

breaking down barriers not only to the flow of

goods and services, but to capital and knowledge as

well. In fact, capital moves more quickly than physical goods.

20 January/February 2006 / Rural Cooperatives

Foreign Affairs

Co-op leaders share strategies

for pursuing global markets 

L
As a result, said Barr, U.S. ag cooperatives

will have to participate in riskier overseas

markets, make new partnerships with foreign

firms, and even invest in overseas ventures to

properly serve their members. 

Unfortunately, the

huge reductions in

transportation and

communications

costs that have

encouraged more

Asian imports into

the U.S. market

have not stimulated

as rapid a growth in

U.S. exports.

While large volumes of imported

goods from Asia

send many dollars

overseas, those dollars often don’t

return as payments

for U.S. exports. A

combination of factors has created this

situation. The government of China has provided significant stimulus to investment over

consumption and uses high tariffs on imported goods to protect domestic industries, such

as agriculture. At the same time, the income

and purchasing power of the Chinese consumers is low and their savings rates are very

high. 

As a result, the money American consumers spend on foreign goods is used to

purchase U.S. financial assets, such as

Treasury bonds and other securities. Barr

pointed out that this is part of a conscious

growth strategy on the part of many Asian

governments to promote demand for their

exportable goods in the United States and

other regions, rather than rely on internaldemand growth. 

With export income being channeled into

purchases of U.S. securities and assets, Asian

countries help keep U.S. interest rates low.

Access to debt at lower rates further encourages American consumers to buy more consumer products, including imported goods.

But it also means that the consumption patterns of Asian consumers don’t reflect the

same benefits: deprived of much of the

export income, they are discouraged by high

tariffs from raising their standard of living by

purchasing imported goods, such as agricultural and other products from the United

States. Thus, both Asian consumers and

American farmers are missing out on much

of the potential benefit of globalization.

Net ag-exporter status ending 

As a result of this changing world market,

the United States’ status as a net agricultural

exporter is coming to an end, Barr said. The

problem, he continued, is not in the commodities sector — although bulk exports

have fallen. Rather, high-value products are

tipping the scales. 

U.S. exports of high-value agricultural

products are actually rising, but, said Barr,

they are not rising fast enough to offset the

rising imports of such items as horticultural

products and other high value agricultural

goods. Meanwhile, commodity exports from

Brazil and other sources are continuing to

increase, and agricultural production continues to consolidate.

Barr believes that the result will be a

growing trend on the part of producers to

attempt to break out of commodity markets

through product differentiation — whether

by product attribute, delivery capability, or

some other distinct value added to the product. The use of new life-science technologies

will offer one route, resulting in new food

and energy products, as well as new pharmaceuticals and other health products.

Serving consumer markets offers another

route, but it is an avenue fraught with complications. Barr pointed out that trends in the

consumer sector are toward goods that are

customized to individual markets — no

longer can a firm expect simply to introduce

products into one market that have been

designed for another. 

In addition, retail outlets are consolidating

rapidly — the Wal-Mart phenomenon —

and food processing companies are consolidating in response, while at the same time

diversifying their product lines, using brand

names and private labels to meet the

demands of various markets.

The implications of Barr’s presentation

were clear: farmer cooperatives must be

willing to forge ties with foreign firms to

compete in the markets of today and tomorrow. Such relationships may take many

forms, from straight client agreements to

joint ventures. 

Rural Cooperatives / January/February 2006 21

“Farmer cooperatives must be willing

to forge ties with

foreign firms to

compete in the 

markets of today

and tomorrow.” 

– Terry Barr 

USDA graphic by Stephen Thompson; Ship image

courtesy Hong Kong Tourism Board
The most important international

markets for agricultural products are

also among the most difficult to deal

with: China and India, together having

38 percent of the world’s population.

The economies of both countries are

developing rapidly, and growing middle

classes are demanding more and more

processed foods. Joint ventures are the

most obvious avenue for market participation in these countries. 

China and India erect high tariff barriers to agricultural imports,

and have laws that prevent

foreign firms from participating by themselves in their

domestic markets. This

means that American cooperatives seeking to break

into those markets will have

to develop joint ventures

with Chinese and Indian

firms.

How co-ops can compete

Barr listed the implications of these trends for

farmer cooperatives. To

compete, he said a co-op

must understand what it

does better than anyone else

— that is the value that it

offers in any business relationship. It must know the

market value of what it

“brings to the table” in any

potential agreement — and

what it would cost its potential partner to duplicate it. 

And it must approach the

international market from a position of

strength domestically: “Deploying

scarce capital resources and capital in

the world market should not take precedence over domestic strategies,” he said.

“You need to have an integrated strategy.”

Cooperative management boards of

directors must develop ways of continually finding and evaluating potential

joint partnerships, Barr emphasized.

This must include communicating with

customers and suppliers about their

own global strategies to identify emerging opportunities and risks. 

Further, they must be aware of how

changes in domestic farm and international trade policy will affect their position in the marketplace, and be ready to

respond.

Behind the curve

Elizabeth Hund of Rabobank told

the gathering that the U.S. agricultural

economy is “behind the curve” in comparison to that of Europe. She pointed

out that the Netherlands, with only a

small fraction of the farm acreage of the

United States, holds the second-largest

share of the world ag export market,

with 10.6 percent compared to the

United States’ 15.5 percent share. 

Hund said that the U.S. share of the

market is falling, while European countries gain, because the European producers are exporting high-value, valueadded goods. She agreed with Barr that

international joint ventures, while

involving difficulty and risk, offer

important opportunities to U.S. cooperatives: “If you can’t beat ‘em, join ‘em!”

Other presenters gave the audience

some examples of successful international collaboration. John Johnson,

CEO of CHS Inc., told the gathering

about that co-op’s experiences with

international joint ventures. CHS has a

well-established, highly profitable relationship with the Japanese corporation

Mitsui — one of the largest publicly

traded corporations in the world.

Johnson said that the impetus for the

partnership came about by accident: a

subsidiary of Mitsui, Wilsey Foods, was

considering acquiring some

of the same smaller companies at which CHS subsidiary

Holsum Foods was looking. 

In addition, it was a large

customer of CHS products.

Both companies decided that

a partnership would avoid

duplication and provide new

opportunities.

The partnership agreement

between CHS and Mitsui was

signed in August 1996, at

which time CHS had $350

million in annual sales, with

$8.5 million in profits. Nine

years later, says Johnson, the

partnership has paid off big

for the cooperative. Ventura

Foods now has $1.2 billion in

annual sales. Profits have

increased more than 800 percent, to between $60 and $70

million in profits, making for

a 25-30 percent return on

members’ equity.

Johnson presented a joint

grain-marketing effort in the

Pacific Northwest, called United

Harvest, as an example of the synergies

achieved by the partnership. Mitsui had

a global portfolio of customers for

American grain, while CHS had access

to the grain at the source. Both firms

each had an export facility in

Washington State — Mitsui at

Vancouver and CHS at Kalama — both

on the Columbia River. Both firms

needed to build new terminals for large,

single-cargo shuttle trains to feed those

facilities — an innovation at the time. 

Mitsui at first planned to build shuttle terminals, but turned the task over

22 January/February 2006 / Rural Cooperatives

Doug Wilson, CEO of Cooperative Resources International, a livestock

breeding co-op, makes a point during the Farmer Cooperative

Conference in Minneapolis. He is flanked by DFA’s Don Schriver and

co-op attorney Mark Hanson of Lindquist & Vennum. USDA photo by

Stephen Thompson 
to CHS with its superior expertise in

that field. The result, said Johnson, was

a venture that paid off for both parties.

Making it work

According to Johnson, the secret to

making an international partnership

work is a good working relationship

between top leadership officials. He

noted that differences between

Japanese and American cultures make

for different management styles,

which must be taken into account and

adapted to. 

“Here in the U.S., we’re used to

doing things by Robert’s Rules of

Order, with an up-and-down vote,” he

said. “In Japan, everybody discusses

the issue until a consensus is reached.”

He said that this resulted in misunderstandings, in which the Japanese

believed a decision had been made

while the Americans still anticipated a

formal resolution. 

Other problems, said Johnson,

included ambivalence by older CHS

members who remembered being at

war with Japan during World War II.

However, a trip by the cooperative

board of directors to Mitsui Headquarters in Japan helped cement cordial relations. Johnson emphasized

that personal relationships between top

management must be cultivated, and

that he, as CEO of CHS, regarded his

ability to call and discuss issues directly

with the president of Mitsui as essential.

The CEO of Growmark, Bill Davisson, presented his perspective on another kind of international partnership:

having co-op members in other countries. Davisson discussed Growmark’s

acquisition of bankrupt United Cooperatives of Ontario (UCO) assets in

1995, saying that the similarities

between UCO and Growmark in structure and core business were a good fit,

and gave Growmark the opportunity to

expand into an area more or less contiguous with its area of operations in

the United States. 

Problems with the merger included

dealing with UCO’s bankruptcy, antitrust regulation in both the United

States and Canada, and issues resulting from differeing business regulations and statutes, including UCO’s

commercial dealings with Cuba, which

are forbidden to U.S. firms. Cultural

issues, including dealing with Frenchspeaking members and Canadian attitudes toward the acquisition of a

Canadian business by a U.S. firm, also

posed obstacles to success. 

Personal relationships help

Like Johnson, Davisson emphasized

the importance of establishing personal

relationships — which in this case

involved getting Canadian and U.S.

leaders and employees together and

allowing them to discover how much

they had in common.

Another Growmark acquisition

involved gaining a 44-percent interest

in MaltaCleyton, Mexico’s secondlargest feed company. In the

MaltaCleyton case, Growmark bought

into an investor-owned, non-cooperative firm. The purchase gave Growmark

an entry into a growing market for

grain south of the border through a

financially sound investment. 

Risks and challenges included a very

different political and cultural situation

from those of Canada and the United

States, which might have complicated a

relationship with a Mexican cooperative.

Davisson concluded that, when contemplating international partnerships,

cooperatives must be true to their basic

principles and assiduous in calculating

risks and benefits. If they choose to

establish a relationship, they must carefully monitor the results. 

Relationships must be carefully nurtured, he said, and local attitudes and

issues must be continually taken into

account.

Gaining access to technology

Dairy Farmers of America used a

joint venture with international partners to gain access to new technology

and develop new markets at home, Don

Schriver, DFA executive vice president,

told the conference. DFA, one of the

largest milk marketers in the world,

represents nearly one third of U.S.

milk production, but had not developed

new fractionated products, leaving it

with limited outlets for its members’

production. 

“Basically,” said Schriver, “we had

conventional dairy products, dried milk

powder and the government.”

DFA attacked the problem by starting a joint venture in 2000 with

Fonterra, a multinational dairy company owned by 13,000 New Zealand dairy

farmers that is the largest exporter of

dairy products in the world. The venture, called DairiConcepts, combines

DFA’s U.S. production capabilities with

advanced technology developed by

Fonterra, to produce dairy and cheese

ingredients for processed food manufacturers.

Items produced by DairiConcepts

include various proteins, fats, dairyderived artificial flavors, milk- and

cheese-based modified powders, powders for infant formula and adult nutritional beverages and preparations, and

hard Italian cheeses. Many of its products are used in the manufacture of

convenience foods such as snacks,

ready-to-eat meals, sauces, soups and

baked goods.

The partners initially each contributed about $25 million to the venRural Cooperatives / January/February 2006 23

Paperwork on an

order must be flawless with foreign customers, or they may

think the exporter is

‘trying to pull a fast

one on them.’ 

– David Fuhrman 

continued on page 44
24 January/February 2006 / Rural Cooperatives

LEGAL CORNER

Bye-Bye Business Judgment Rule?

By Donald A. Frederick

Program Leader for Law,

Policy & Governance;

USDA Rural Development/

Cooperative Programs

donald.frederick@usda.gov

ooperative directors owe a

fiduciary duty to the

membership to exercise

their authority in the best

interests of the association

and all of its members. In lawsuits

claiming directors violated their duty,

courts have routinely applied the “business judgment rule.” 

In its simplest terms, the business

judgment rule provides that a board

action is protected from challenge if

there is a good business justification for

the decision and it isn’t fraudulent or an

abuse of discretion. When the business

judgment rule is applied, the burden of

proof to establish the impropriety of the

decision is on those challenging it.

But in today’s environment of

heightened concern over the diligence

of directors, courts may begin looking

for another standard for measuring

director conduct. In a recent decision

involving a suit against a housing cooperative and most of its directors, the

appellate court said the trial court

should have applied a “reasonableness”

test, and the burden of proof should be

on the directors to prove their actions

were indeed “reasonable.”

Case facts

In 1974, an apartment building on

Wisconsin Avenue in the District of

Columbia was converted to a housing

cooperative. The cooperative association financed the purchase with money

borrowed from the developer who had

owned the building, and signed a 30-

year mortgage repayment agreement

with the developer. A pro-rata share of

the mortgage obligation was assigned to

each housing unit in the building, based

on the relative value of the units at the

time. Contracts between the cooperative and its members required the members to make monthly payments on

their share of the mortgage, which the

cooperative used to pay its monthly

obligation to the lender.

The contracts between the cooperative and its members permitted the

members — at their option — to prepay their mortgage obligation. Over the

first 20 years of the mortgage, a small

minority of the members prepaid their

obligation.

By the mid-1990s, the developer was

bankrupt and his assets were controlled

by a bankruptcy trustee. The cooperative had several unresolved claims

against the developer. The cooperative

had a cash reserve comprised in large

part of payments from members. It

struck a deal with the bankruptcy

trustee to pay off the remaining balance

due on the mortgage, less a negotiated

amount for its claims against the developer.

After this deal was completed, the

directors made two decisions which led

to a lawsuit. First — since the mortgage that was the basis for the contracts

requiring special monthly payments

from the members no longer existed —

the board voted to forgive the amounts

remaining on those notes. Second —

since there were no notes to forgive in

the case of the members who prepaid

their obligation — the board deliberated at length over whether the cooperative should pay a rebate to those members on the theory that they had overpaid. After consulting with legal counsel, the board determined it had no

equitable basis to justify the rebates and

so voted not to use cooperative funds to

pay the proposed rebates.

Two members who had prepaid their

obligation, including one person who

was a director at the time and had

argued and voted for rebate payments,

sued the cooperative and the other

directors for breach of contract and

breach of fiduciary duty. They asked for

monetary damages equal to the amount

they alleged they would have saved had

they not prepaid their obligation and

been treated the same as the other

members, including the other directors.

Trial court applies

business judgment rule

Both sides of the case moved for

summary judgment, a decision by the

court that they will prevail even if the

facts are interpreted favorably for the

other side. The trial court denied the

motion of the unhappy members and

granted the motion of the cooperative.

First, the court said the unhappy members hadn’t shown it any provision of

their contract with the cooperative that

could have been violated by the cancellation of the notes covering the mortgage.

As to breach of fiduciary duty, the

trial court referred to the business judgment rule and concluded there was no

evidence that the board acted hastily or

irresponsibly. Thus, a jury could not

rationally conclude the board engaged

in any misconduct subjecting the cooperative to liability.

continued on page 42

C
Rural Cooperatives / January/February 2006 25

Largest 100 agriculture co-ops 

post strong margins in 2004

Table 1—Consolidated Statement of Operations, 2003-04, Top 100 Cooperatives; values in $1,000

2004 2003

Difference % Change

Revenues

Marketing 53,529,034 43,833,692 9,695,342 22.1%

Farm Supply 15,957,236 14,504,208 1,453,028 10.0%

Total Sales 69,486,270 58,337,900 11,148,370 19.1%

Other Operating Revenues 733,875 653,915 79,960 12.2%

Total Operating Revenues 70,220,145 58,991,815 11,228,330 19.0%

Cost of Goods Sold 63,344,425 53,638,947 9,705,478 18.1%

Gross Margin 6,875,720 5,352,868 1,522,852 28.4%

Expenses

Operating Expenses 5,450,743 4,388,502 1,062,241 24.2%

Net Operating Margins 1,424,977 964,366 460,611 47.8%

Other Revenues (Expenses)

Interest Expense (424,624) (398,052) (26,572) 6.7%

Interest Revenue 18,722 25,582 (6,860) -26.8%

Other Income 212,961 345,594 (132,633) -38.4%

Other Expenses (194,017) (119,278) (74,739) 62.7%

Patronage Revenue 164,601 96,985 67,616 69.7%

Net Margins from Operations 1,202,620 915,197 287,423 31.4%

Non-Operating Rev. (Exp.) (47,716) (44,709) (3,007) 6.7%

Net Margins 1,154,904 870,488 284,416 32.7%

Distribution of Net Margins

Cash Patronage Dividends 291,403 285,044 6,359 2.2%

Retain Patronage Dividends 502,570 383,756 118,814 31.0%

Nonqualified Noncash Patronage 30,055 7,296 22,759 311.9%

Dividends 19,172 18,937 235 1.2%

Unallocated Equity 194,009 114,182 79,827 69.9%

Income Tax 117,695 61,274 56,421 92.1%

Total Distribution 1,154,904 870,488 284,416 32.7%

Top 100 ✔

By David Chesnick, Ag Economist

USDA Rural Development 

The rapid rate of change impacting

the nation’s 100 largest agricultural

cooperatives slowed considerably in

2004 from the previous several years. It

was not only a year of stabilization, but

of strong performance, as the top 100

ag co-ops posted record gains in sales

and margins (table 1), based on USDA’s

preliminary survey results. Total operating revenue for the top 100 jumped 19

percent, to $70 billion. All co-op commodity groups reported increased revenue. Dairy and diversified cooperatives

led the way, accounting for two-thirds

of the total revenue increase. 

Gross margins were up 28.4 percent,

reaching $6.9 billion. The largest

increase was in the dairy sector, which

accounted for 61.5 percent of the total

jump in gross margins for the top 100

co-ops. Fruit/vegetable and rice were

the only sectors to record a decline in

gross margins. Despite higher sales for

these two sectors, fruit/vegetable and

rice cooperatives paid a higher cost of

goods sold. Thus, it appears likely that

these cooperatives returned more to

their members up front, rather than as

patronage later on.

Operating expenses also jumped 24.2

percent, to $5.4 billion. Dairy co-ops

again had the biggest jump in operating

expenses, which increased $859 million.

That jump accounted for nearly threefourths of the top 100 co-ops’ total

increase in operating expenses.
26 January/February 2006 / Rural Cooperatives

Operating margins soar $1.4 billion

Operating margins for the top 100

shot up a whopping 47.8 percent, to 

$1.4 billion. Leading the increase were

poultry/livestock cooperatives, a reversal of fortune from 2003, when poultry/livestock cooperatives were the only

commodity group to post operating

losses. In 2004, top 100 cooperatives in

this sector had operating margins of

$238 million, a 634-percent jump from

the year before. 

Fruit/vegetable and rice cooperatives

saw operating margins decline from

2003 to 2004, mostly due to lower

gross margins. However, fruit/vegetable cooperatives still posted solid

operating margins of $204 million.

Rice cooperatives continue to operate

with tight margins.

Despite lower total debt levels, interest expense for the largest 100 agriculture cooperatives increased 6.7 percent,

to $425 million. The dairy sector saw

interest expense climb 32.8 percent, to

$71 million. Poultry/livestock cooperatives also saw interest expense rise from

$9 million in 2003 to $37 million in

2004.

“Other revenue,” including interest

income and revenue from operating

sources not directly related to operations, was down 37.6 percent, to $232

million. Nearly all co-op commodity

groups except for cotton, diversified

and grain saw other revenue decline. 

“Other expenses” were up 62.7 percent,

to $194 million. The largest increase in

other expenses occurred in the diversified and poultry/livestock cooperatives. 

Patronage refunds received from

other cooperatives were up 69.7 percent, to $165 million. However, 78.3

percent of that total increase was due to

dairy cooperatives, which received

$72.4 million in patronage refunds for

2004. Fruit/vegetable cooperatives

were the only commodity group to see

patronage refunds decline. 

The 100 largest ag co-ops suffered a

6.7-percent increase in non-operating

expenses, which ended 2004 at $48 million. These non-operating expenses or

revenues are usually one-time situations, such as accounting changes or

gains and losses from discontinued

operations.

Net margins were up 32.7 percent,

to $1.2 billion. Leading the jump were

poultry/livestock cooperatives. They

moved from a net loss of $67 million in

2003 to net margins of $150 million in

2004. The largest decline in margins

occurred in the fruit/vegetable cooperatives, which declined 28.2 percent, to

$154 million. 

Assets up 5.5 percent 

Assets for the nation’s 100 largest

agriculture cooperatives were up 5.5

percent (table 2) in 2004. Driving the

increase were current assets, which

climbed 8.3 percent and ended 2004 at

$12.7 billion. Nearly all commodity

groups had an increase in current assets,

with the exception of diversified cooperatives. Current assets for diversified

cooperatives dipped 0.1 percent, to $3.4

billion. 

Cash assets had the largest percentage increase, jumping 23.4 percent, to

$1 billion. Cotton, dairy, grain, poultry/livestock and sugar cooperatives all

had higher cash balances in 2004.

Poultry/livestock cooperatives had the

largest increase, $127 million.

Accounts receivable were up $410

million, to $5 billion. All commodity

groups experienced an increase in

accounts receivable. However, it is

more likely a result of higher sales than

a collection issue. This is illustrated by

the “days sales in accounts receivable”

ratio. This ratio divides accounts

receivable by the average daily sales. A

higher number will indicate the longer

it takes to collect on sales. This average

value for all cooperatives dropped from

28.1 days to 26.8 days. 

Inventory for the top 100 co-ops was

up $133 million, to $5.3 billion.

Diversified and grain cooperatives were

the only commodity groups that had

declining inventory levels. As with

accounts receivable, most of the inventory buildup is likely a reaction to

higher sales. 

Total investments were down a

slight, 0.7 percent, to $3.4 billion. The

drop in investments was mostly due to

investments in other cooperatives,

including cooperative banks. Diversified, grain and poultry/livestock cooperatives accounted for nearly 85 percent

of the total drop in cooperative investments. 

By contrast, investments in other

businesses were up 3.2 percent, to $1.4

billion. Dairy, diversified, farm supply

and grain cooperative accounted for

about 99 percent of the total increase in

non-cooperative investment. 

Modest investment gain

for co-op fixed assets

Investments in fixed assets were up

0.4 percent for the largest agriculture

cooperatives in 2004. The average

amount of fixed assets purchased was

$12 million, up from $10 million in

2003. 

Other long-term assets were up $338

million, to $2.4 billion. Dairy cooperatives accounted for nearly the total

increase.

Total liabilities were up 5.3 percent,

to $15 billion. Driving the surge were

current liabilities, which were up 9.9

percent, to $9.6 billion in 2004. Total

long-term liabilities were down 1.8 percent, to $5.7 billion.

Despite higher overall liabilities,

debt was lower in 2004. Short-term

debt was down 2.2 percent, to $2.2 billion, and long-term debt less current

portion was down 3.8 percent, to $4.5

billion. 

The decline in short-term debt was

mostly due to diversified and grain

cooperatives. Diversified cooperatives

had a large increase in their cash flow

from operations and were able to pay

off some of their outstanding shortterm loans. They also appear to have

transferred some of their working-capital financing to vendors in the form of

higher accounts payable. 

Grain cooperatives seem to have

shifted some of their working capital

✔ Top 100
Rural Cooperatives / January/February 2006 27

Table 2—Combined Balance Sheet, 2003-04, Top 100 Cooperatives; values in $1,000

Assets 2004 2003 difference % change

Current Assets

Cash 1,039,778 842,342 197,436 23.4%

Accounts Receivable 5,017,090 4,606,763 410,327 8.9%

Inventory 5,253,630 5,120,194 133,436 2.6%

Other Current Assets 1,416,470 1,185,499 230,971 19.5%

Total Current Assets 12,726,968 11,754,798 972,170 8.3%

Investments

Cooperative Banks 264,958 281,697 (16,739) -5.9%

Other Cooperatives 1,389,468 1,451,779 (62,311) -4.3%

Other Investments 1,792,428 1,737,674 54,754 3.2%

Total Investments 3,446,854 3,471,150 (24,296) -0.7%

Net PP&E 6,482,415 6,456,628 25,787 0.4%

Other Assets 2,447,885 2,110,172 337,713 16.0%

Total Assets 25,104,122 23,792,748 1,311,374 5.5%

Liabilities

Current Liabilities

Total Short-term Debt 2,151,072 2,199,392 (48,320) -2.2%

Accounts Payable 3,470,214 3,134,431 335,783 10.7%

Member Payables 701,620 569,528 132,092 23.2%

Patron and Pool Liabilities 1,668,822 1,415,441 253,381 17.9%

Other Current Liabilities 1,585,597 1,392,734 192,863 13.8%

Total Current Liabilities 9,577,326 8,711,526 865,800 9.9%

Long-term Debt

less current portion 4,506,261 4,683,228 (176,967) -3.8%

Other liabilities and deferred credits 1,145,948 1,069,691 76,257 7.1%

Total noncurrent liabilities 5,652,209 5,752,919 (100,710) -1.8%

Total liabilities 15,229,535 14,464,445 765,090 5.3%

Minority interest 908,701 944,740 (36,039) -3.8%

Member equity

Preferred stock 967,812 945,293 22,519 2.4%

Common stock 176,689 174,714 1,975 1.1%

Equity certificates and credits 6,337,951 6,047,219 290,732 4.8%

Unallocated capital 1,483,434 1,216,337 267,097 22.0%

Total equity 8,965,886 8,383,563 582,323 6.9%

Total liabilities and equity 25,104,122 23,792,748 1,311,374 5.5%

loans to longer term debt and member

liabilities. All the other commodity

groups had higher working capital

loans.

Accounts payable jumped 10.7 percent, to $3.5 billion. Most of the

increase was in the dairy and diversified

groups. It is interesting to note the

jump in accounts payable for diversified

cooperatives. Generally, accounts

payable are used for short-term financing of inventory. However, diversified

cooperatives actually reduced the

amount of inventory carried. This indicates they were funding more of their

operations with accounts payable. On

the other hand, cotton and sugar cooperatives were the only commodity

groups with lower accounts payable. 

Members payable and patron and

pooling liabilities were up for nearly all

co-op commodity groups. Generally,

these are amounts owed to members/

patrons for commodities marketed

through the cooperative. Higher sales

of member commodities will correspond with higher member/patron 

liabilities. 

The only exception to this was rice

cooperatives. Despite higher sales,

member/patron liabilities were down

31.6 percent.

Other current liabilities were up 13.8

percent. All commodity groups had

higher “other” current liabilities.

✔ Top 100

continued on page 38
By David Chesnick, Ag Economist

USDA Rural Development 

This financial analysis views the nation’s 100 largest

agriculture cooperatives, taken as a whole. To get a better

picture of the cooperative landscape, this section will

focus on performance measures. Selected average ratios

are used for this analysis (table 1). The average ratio is

used to mitigate the effects of the largest cooperatives on

the performance measurements. The average ratio gives

equal weight to all cooperatives and provides an additional

perspective on the performance of the nation’s largest

agriculture cooperatives.

Liquidity measurements are used to judge short-term

stability of a business. In this analysis, we use the current

and quick ratios. The current ratio is current assets divided

by current liabilities. This provides an insight into how well

the cooperative can meet its current obligations. 

The quick ratio is similar to the current ratio except that

inventories are excluded from the current assets. Inventory

is usually considered the least liquid of these assets. Thus,

excluding them from this analysis may provide a more

accurate picture of liquidity. 

There was no change in the average current ratio for all

of the top 100 cooperatives. However, there were variations within the different commodity sectors. Diversified,

fruit/vegetable, poultry/livestock and rice cooperatives had

some loss in their liquidity, as both current and quick ratios

fell. The one exception was the diversified cooperatives,

which improved their average quick ratio due to lower

inventory levels relative to other current assets. All other

commodity groups showed improved liquidity.

Leverage ratios

Leverage ratios provide insight into the use of debt to

finance the cooperative. Debt-to-equity examines the percentage of assets held by outside interests. The average

debt-to-equity ratio for the top 100 co-ops remained relatively steady from 2003. There were variations within the

commodity groups, but the variations were substantial with

the exception of cotton, poultry/livestock and rice. 

Substantial changes would be those that move more

than 1 percentage point. Both cotton and poultry/livestock

reduced their reliance on outside financing by 3 percentage points. Rice co-ops, on the other hand, showed a jump

in their average debt-to-asset ratio, moving from 47 to 51

percent. 

Long-term debt-to-equity focuses more on the long-term

stability of a business. For all cooperatives, the average

long-term debt-to-equity improved dramatically, moving

from 81 percent to 67 percent. Grain cooperatives were

the only commodity group to rely more on long-term debt

than on equity. Their ratio went up from an average of 46

percent to 51 percent. This also could be a concern due to

an increasing trend since 2001 to use more debt relative to

equity for long-term financing of the cooperative.

Of course, the use of leverage can be beneficial if the

business can generate more margins than it costs to service that debt. The times-interest-earned ratio examines

how many times margins can cover interest expense.

While interest expense went up for most of the largest

agriculture cooperatives, net margins seemed to increase

more. The average times-interest-earned ratio increased

from 3.3 times to 3.9 times. 

Rice and sugar co-ops had declining average values of

times-interest-earned. Rice showed the largest average

drop, falling from 9.3 to 4.0

Efficiency ratios

Efficiency ratios show how a business uses its assets to

generate sales. The average local asset turnover for the

top 100 increased from 3.2 to 3.5 in 2004. This suggests

that, on average, every dollar invested in assets generates

$3.50 in sales. With the exception of fruit/vegetable cooperatives, all other commodity groups were able to generate

more revenue on the assets they employed. 

Fruit/vegetable cooperatives slipped from 2.4 to 2.2

times. However, this was due to the restructuring of one

cooperative. Excluding it, the average local asset turnover

actually increased from 3.5 to 3.6 times.

Fixed asset turnover focuses specifically on how well

the cooperative business uses its fixed assets to generate

sales. Similar to the average local asset turnover, higher

sales lifted most fixed asset turnover ratios. The average

fixed asset turnover for the top 100 cooperatives rose from

16.2 to 17.9 times. Only cotton cooperatives had a lower

ratio. Cotton cooperatives’ average fixed asset turnover

fell from 22.2 to 21.1 times. 

One cotton cooperative made a large purchase of fixed

assets in 2004. So this decline may be temporary if the

investment can generate higher sales in future years.

Profitability ratios

While cooperatives are generally considered “not for

profit” enterprises, they do need to generate enough margins to compensate for their members’ investment.

Therefore, profitability ratio trends that show margins eroding can indicate that a cooperative is heading for trouble. 

The gross margin percent gives an indication of the pricing strategy of the cooperative. If a marketing cooperative is

Measuring cooperative performance ✔ Top 100

28 January/February 2006 / Rural Cooperatives
paying too much for its member’s product or a supply cooperative isn’t charging enough for its products, there may not

be enough gross margins left to cover operating expenses. 

The average gross profit margin of the top 100 co-ops

fell from 14.7 percent to 13.9 percent in 2004. This is a good

time to point out the influence of some of the largest cooperatives within the top 100 database. Looking at table 1,

the increase in total sales for all cooperatives exceeded

the increase in total cost of goods sold. This resulted in a

cumulative gross profit margin increase from 9.1 percent to

9.8 percent in 2004. This is in direct conflict with the average gross profit margin. 

The top 10 cooperatives generate 58 percent of total

operating revenues for the top 100. Therefore, while the

overall picture has been rosy, there is cause for concern

with the top 100 cooperatives. The average gross profit

margin has been slipping

during the last 5 years. In

2000, the average gross profit margin was 15.2 percent

and has declined almost

every year since then. 

Looking at the gross margins trend doesn’t tell the

whole story. While it is true

that the gross margins have

declined over the past 5

years, if the cooperatives are

becoming more efficient in

the use of their assets and

other inputs, the lower gross

margins wouldn’t hurt a cooperative. Therefore, members

could benefit upfront from the pricing strategy of the cooperative. Higher efficiencies will show up in higher net margins.

The net margins percent looks at net margins divided by

total operating revenue. For the largest agriculture cooperatives, the average net margin percent fell 0.1 percentage

point, to 1.6 in 2004. Fruit/vegetable, rice and sugar co-ops

averaged the largest decline in net operating margins, each

declining between 1 and 2 percentage points. However,

these three commodity groups experienced a substantial

jump in net margins in 2003. The slide in 2004 still left them

with an average ratio of just under 2 percent, which is higher than the overall average ratio for the top 100. 

Poultry/livestock co-ops had the largest increase in net

profit margins. They had a net loss of 1.1 percent in 2003,

but improved to 2.1 percent net margin in 2004.

Return on assets & equity

Return on assets looks at net margins before interest

and taxes are deducted. This looks at the total return for

all interested parties, including debt holders and government. The average return on assets for all top 100 ag

cooperatives increased from 6 percent in 2003 to 6.3 percent in 2004. However, fruit/vegetable, rice and sugar all

had declining average return on assets. 

The fruit/vegetable co-op sector fell from an average of

14 percent to 8.3 percent, while rice fell from 10.9 percent

to 6 percent in 2004. These two commodity groups had the

largest average decline. Sugar fell from 5.6 to 4.8 percent. 

There was a substantial jump in the average return on

assets for cotton and poultry/livestock cooperatives.

Cotton cooperatives increased from an average of 13.3 percent to 17.3 percent, while poultry/livestock cooperatives

increased from 0.7 percent to 7.4 percent. 

Return on member equity measures the return only to

equity investors. In other words, interest and taxes are

deducted from net margins.

The difference between the

return on assets and return

on member equity illustrates the effect of leverage. 

For example, the average return on assets in

2004 was 6.3 percent while

the average return on

member equity was 11.8

percent. This 5.5 percent

difference represents

returns to members for

using outside financing

where the cost of borrowed funds was less than the

returns generated from those funds. The average return on

member equity fell from 13.3 percent in 2003 to 11.8 percent

in 2004. 

Co-ops in good shape

Overall, the largest agriculture cooperatives are in good

shape. There has been some decline in their gross margins, but efficiencies have been able to keep net margins

from sliding too far. The level of debt has been reduced. 

However, the use of credit and member payables helped

fund operations. This leverage has given most members of

the largest agriculture cooperatives higher returns on their

investment than they would have received if they had been

able to invest the total amount. Nevertheless, it is important

to keep in mind that much of the outside funding is located in

the current account. As long as operations continue to show

improvement, this should not be too much of a concern. 

However, if operations should fall short for some cooperatives within the next year or two, there could be a further shake up in the top 100 agriculture cooperatives. ■

Table 1—Selected ratios, 2003-04, Top 100 Cooperatives

2004 2003

Current Ratio 1.35 1.35

Quick Ratio 0.73 0.73

Debt-To-Assets 0.64 0.63

Long-Term Debt-To-Equity 0.69 0.81

Times Interest Earned 3.85 3.31

Local Assets Turnover 3.48 3.24

Fixed Assets Turnover 17.89 16.19

Gross Profit Margin Percent 13.89% 14.72%

Net Margin Percent 1.63% 1.75%

Return On Total Assets 6.28% 5.97%

Return On Members Equity 11.83% 13.29%

✔ Top 100

Rural Cooperatives / January/February 2006 29
30 January/February 2006 / Rural Cooperatives

About the group:

The Idaho Straw Value-Added

Committee (SVAC), led by Grant 4D

Farms, consists of an 86-member steering committee of wheat and barley

growers in the southern and eastern

third of Idaho. The group is pursuing

the formation of a cooperative or producer-owned Limited Liability Co.

(LLC) to develop advanced harvesting,

storage, pre-processing and transportation systems to supply straw to industrial processors. The systems are being

designed to meet the industry standards

that growers and suppliers have to comply with to supply feedstock for ethanol

and other bio-products.

Business objective:

The committee’s objective is to have

member-growers supply nearly 1 million tons of high-quality straw annually

to a cellulose ethanol biorefinery. Iogen

Corporation, a Canadian firm partially

owned by Royal Dutch Shell, is considering the construction of such a refinery

in Idaho. Current plans call for a facility

capable of processing 600,000 to

800,000 tons of straw annually, with an

output of approximately 55 to 65 million gallons of ethanol.

If the committee is successful in

forming a cooperative and meeting its

production goals, farmers could collectively earn an additional $25 million to

$30 million annually, by selling straw

products to Iogen. This Idaho industry

could produce up to 65 million gallons

of ethanol beginning in 2009. This

emerging technology not only would

invigorate and revitalize Idaho’s rural

agricultural economy, it would also contribute to the nation’s energy security.

Key players:

The Idaho Wheat Commission, a

grower-funded market development

agency, funded a 1995 study to quantify

the tonnage of straw available across

Idaho. Building upon the base knowledge that more than 2 million tons of

straw was available for development, the

commission conducted several outreach

programs to raise awareness of the

unused asset. Interested Idaho growers

were informed and, working with a

variety of groups — including the

National Association of Wheat

Growers, the Idaho Grain Producers,

the Idaho Wheat Commission and the

U.S. Department of Energy’s Idaho

National Laboratory (INL) — began

exploring new markets. These efforts

culminated in a “straw tour” of Idaho,

during which Iogen — as an invited

participant — saw the potential of a

plant in southern Idaho. 

USDA VAPG funding: 

The availability and suitability of

Idaho straw — as well as numerous

logistical issues associated with harvesting and delivering the required 800,000

tons of straw annually — were serious

impediments to successfully locating a

bio-refinery in Idaho. Growers decided

to seek a USDA Rural Development

grant for a feasibility study on whether

they could supply a large bio-refinery.

Grant 4D Farms, serving as lead for the

project, was awarded $450,000 through

USDA’s Value-Added Producer Grant

(VAPG) program for planning purposes, including a feasibility analysis, marketing and business operations plans.

This initial funding was supplemented

by $475,000 in cash and in-kind contributions by project partners, including

Iogen, Diamond Z Corporation, Trinity

Trailer Corporation, MacRae Custom,

D&L Custom, KM Custom and

CaseIH Corporation.

The technology:

Iogen, with a significant investment

from Petro-Canada, began producing

the world’s first cellulose ethanol fuel for

commercial use in 2004. After looking

around the world, it identified southern

Idaho as one of the best locations for a

straw-to-ethanol facility. Idaho’s assets

include a highly productive and relatively dry climate, as well as proximity to

INL’s energy research center. 

According to Iogen’s Maurice

Hladik: “Iogen is an enthusiastic participant in what is probably the most serious and practical research effort into

new fundamental approaches of harvesting and transporting massive amounts

of feedstock for the cellulose ethanol

industry. The cooperative approach by

Idaho farmers that took the lead on this

initiative, along with USDA, the Idaho

National Laboratory and the private

sector, has proven to be a highly effective combination of diverse resources

and skills to yield such practical

results.”

Iogen officials say their long-term

plans call for siting additional bio-refinery facilities in biomass-basins throughout North America and other continents. Other public and private groups

have expressed a similar belief that cellulose ethanol will be viable wherever

sufficient quantities of feedstock are

available. Consequently, producers of

wheat, corn, sugarcane, switch grass and

other commodities throughout the

V ALUE-ADDED CORNER

Idaho Straw Value-Added Committee

Southern Idaho
Rural Cooperatives / January/February 2006 31

United States will have opportunities to

access a new market as cellulose biorefining comes of age.

Collaborative efforts: 

Under this partnership, growers and

other collaborators have identified and

resolved issues related to the quantity

and quality of straw to be harvested,

use and condition of existing harvesting equipment, alternatives for storing

straw and transporting it to a potential

biorefinery. The University of Idaho

characterized and quantified aspects of

feedstock production. Southern Idaho

farmers worked with INL and others

to understand and resolve issues related to harvesting, storing and pre-processing the feedstock; to protecting the

integrity of the straw while in temporary storage; and to clarify methods to

transport biofeedstock in compliance

with a refinery’s product specifications.

Iogen has already participated, as an

end-user, to demonstrate the technology necessary to successfully convert the

straw into fuels and chemicals, and to

define the requirements of the receiving biorefinery. As part of the feasibility project, Iogen successfully

processed two 20-ton loads of Idaho

wheat and barley straw into cellulose

ethanol at its Ottawa, Canada, demonstration plant.

Business model:

At this point, the committee has not

determined the business structure best

suited for the value-added business in

Idaho. However, it is looking at several

possibilities, each of which would require

early negotiations and full integration

into Iogen’s biorefinery operating plan to

be successful. Models include:

• A new-generation (closed) cooperative

that follows a model successfully

proven in other agriculture businesses

(such as sugar processing co-ops).

Members of the cooperative would

purchase stock in proportion to the

quantity of straw each member would

sell to the processor. An advantage of

this arrangement is the economic

benefit that could be broadly shared,

co-opting the broader grower community in the success of the venture

and increasing the assurance of a sustainable supply of straw. 

• A closely held stock company that

raises initial investment capitol by

selling stock to a limited number of

investors or entities currently

involved in agricultural production in

southern Idaho.

Apart from these dealings, Iogen is

working with investors to secure financing to build a biorefinery. The company

is also working to qualify for loan guarantees made available for new energy

technologies through provisions of U.S.

energy legislation enacted by Congress

in 2005. Current development plans call

for an investment of approximately $300

million for the cellulose ethanol plant

plus cogeneration and enzyme facilities.

Importance of USDA backing:

“The USDA Rural Development

grant provided the boost we needed to

demonstrate how ideal Idaho is for siting a straw bio-refinery. Even more

important, the VAPG is helping to

demonstrate that cellulose-based ethanol

has a place in the nation’s energy portfolio,” says Grant 4D Farms owner Duane

Grant. “With this seed money, Idaho

farmers demonstrated the feasibility of

locating a bio-refinery in Idaho. And in

10 years, we’ll look back and recall that

receiving USDA’s grant was the pivotal

turning point in our push to launch the

cellulose ethanol industry in Idaho.

Thanks to the VAPG, we have demonstrated that we can consistently supply

straw on an industrial scale to a commercial bio-refinery.”

Major challenge/

opportunity facing co-op: 

The major problem facing producers

is how to best assemble, store, prepare

and deliver nearly 1 million tons of

straw that would be required by a cellulosic ethanol facility each year. The

availability and cost of the feedstock,

the lack of confidence in the conversion

technology and the hesitancy of financial backers to lend capital are still seen

as barriers to this business venture. But,

with USDA’s assistance and the persistence of Idaho farmers, these barriers are

being overcome.

Other challenges, revolve around the

successful launch of the cellulose-based

ethanol industry. Significant technical

and political issues remain to be

addressed. Iogen is clearly the world

leader in this area, and through ongoing

continued on page 40

The Idaho Straw Value-Added Committee is pursuing the formation of a producer-owned

co-op or LLC to supply a proposed ethanol plant that would produce fuel from straw. Here,

growers celebrate a milestone in the effort, when they hauled two truckloads of Idaho

straw to Ottawa, Canada, where it was processed into ethanol. Photo by Maurice Hladik
32 January/February 2006 / Rural Cooperatives

By Jane Livingston

Editor’s note: Livingston is a Maine-based

freelance communicator and marketing consultant who specializes in cooperatives.

mejane@gwi.net.

t may not be happening as

rapidly as some would

like, but it’s happening.

The co-op model is

catching the attention of

people outside ‘the usual cast of characters.’ In fact, the 21 cooperative development center-members of

CooperationWorks! have seen requests

for assistance triple in the past three

years.

“Cooperatives may be one of the

best kept secrets in America, but we’re

working to change that,” says Audrey

Malan, executive director of

CooperationWorks!, whose membercenters serve people in 45 states. 

Interest in the co-op business model

is coming — as it always has — from

entrepreneurial types who want to be in

business for themselves, but who lack

the capital or other resources to do it.

Others simply prefer to share the risks

and rewards of business ownership.

Increasingly, interest in co-ops is coming from economic development loan

funds, financial institutions, government officials, community nonprofit

organizations, religious congregations

and chambers of commerce. 

“Too many development groups and

business educators still don’t know

enough about the cooperative business

model,” Malan says. “Yet the potential

for cooperative enterprise to play a role

in economic development is enormous

as communities struggle to find solutions to shared challenges in agriculture, energy, affordable housing, healthcare, childcare, senior services and the

creation and retention of good jobs.”

Development practitioner 

may hold key

Cooperative business development

holds great promise, but it’s a tall order

to fill. An effective development practitioner is often the key to helping a

group of people implement sound business practices and help them engage in

running their business in a truly cooperative way.

“It can be a big challenge to start a

cooperative, especially for those new to

it,” says Malan, who worked as a cooperative business development practitioner in Washington state prior to taking the reins at CooperationWorks! 

“In its formative stages — typically a

two-year process — a co-op can be sabotaged by its lack of information,

access, skills or experience. Co-op

development specialists can make the

difference, from providing technical

business assistance to helping people

learn how to recognize and act on business opportunities. 

“This can range from demonstrating

how to operate a business in a democratic and professional way, to linking

co-op members with community partners and surfacing co-op leadership. A

skilled co-op development practitioner

is a valuable community asset.”

Accelerating skill development

To accelerate and increase professional competence of co-op development practitioners, CooperationWorks!

has revised its training program. In two

intensive, five-day sessions held in

Madison, Wisc., during May and

An Art & Science

Revised co-op development curriculum 

gets test drive in Madison workshops 

I

“Too many development groups and business educators still don’t know enough about the

co-op business model,” says Audrey Malan, executive director of CooperationWorks!, seen

here leading a workshop in Madison. Opposite page: Workshop participants gather for a

class photo. Photos by Eric Bowman, NW Co-op Development Center
Rural Cooperatives / January/February 2006 33

November, 31 participants test-drove

the revised program. Afterward, participant evaluations were highly positive. 

Anne Reynolds, assistant director of

the University of Wisconsin Center for

Cooperatives, was a consultant for the

CooperationWorks! 2005 training program, called ‘The Art and Science of

Cooperative Business Development.’

“We used the theme of ‘art and science’

to acknowledge that cooperative development is both,” she says. 

“You’re seen as an expert in some

sense. Like a scientist,” Reynolds continues, “you have privileged information. Only your role is not to be the

leader; it’s to identify and develop leadership. But it’s even more. It is also to

help the whole cooperative group work

together. You have to be a good facilitator, but you also must have the information they expect you to have. That’s

what makes the role so complex.” 

The training program grew from a

planning committee comprised of co-op

experts from around the country. It

offered participants a mix of classroom

work and more experiential learning. 

Participants are engaged in detailed

case studies during which small groups

explore the nitty gritty of several successful cooperative enterprises. A wellplanned menu of site visits allowed

trainees to question and observe how

the principles and values of cooperation

are practiced “on the ground.”

“It was a very thoughtful process,”

says Margaret Bau, cooperative development specialist for USDA Rural

Development in Wisconsin, who was on

the planning committee and a trainer in

the program. “We asked current cooperative development practitioners, coop attorneys and accountants to identify

‘the perfect training.’ We got all kinds

of great ideas, then winnowed them

down to what was manageable.”

Session One concentrated on the

‘science’ of co-op development. It

employed comparative business models;

critical development steps (including

feasibility analysis and business planning); co-op finance, equity and legal

issues; co-op governance and management, and keys to success. Session Two

took on the ‘art’ of helping groups of

people cooperate to build a successful

business. The curriculum included

group dynamics, team development,

visioning and strategic planning, systems thinking and conflict management.

Understanding group dynamics 

Understanding the group dynamics

of cooperatives is an evolving field,

notes Bau, who has helped a number of

homecare workers’ co-ops emerge in

recent years. 

She speaks highly of the program’s team development and

the focus on working effectively

with groups. 

“The group dynamic can bring

synergy, or tear things apart,”

Bau observes. “We can learn

what to be aware of, what to

look for, how to respond. We

can take what we learn back to

all the co-ops we work with, and

become bridges for all this valuable experience — from the successes to the start-ups.

“Even though I’ve been doing

co-op development for 7 years,

the training was a growing experience,” Bau adds. “We did

some internal conflict awareness

and resolution...that hit home

because it was paired with case

studies and site visits.”

Participant Eric Bowman, of

the Northwest Cooperative

Development Center, was impressed by

the caliber of trainers, the substance of

program content and the flexibility and

diversity of its delivery. “Practitioners

have some of the same challenges, and

we can use some of the same techniques

to mitigate them,” he says. “This program increased my ability to understand

the needs of groups, to anticipate pit-

“The group dynamic

can bring synergy, or

tear things apart.”

—Margaret Bau
34 January/February 2006 / Rural Cooperatives

falls and to cope better with the

inevitable. And it gave me the bigger

picture of how our center fits into the

national system. This is a very important time for us to be paying attention

to one another.”

Sharing information, insight,

resources, challenges and strategies to

advance cooperative enterprise is the

reason CooperationWorks! was created.

Its member centers have developed

nearly 400 new rural businesses, owned

and controlled by more than 47,000

members and created 5,800 new jobs.

Investment in these co-op businesses

exceeds $900 million. 

USDA provides support

The centers receive core funding

through the Rural Cooperative

Development Grant program of USDA

Rural Development, and use it to provide critical services to those seeking to

start or strengthen a cooperative enterprise. New co-ops generate new tax revenue, new jobs and new wealth for rural

America. 

For example, Minnesota alone —

one of the states where co-op impact

data has been measured — employs

nearly 80,000 people in cooperatives,

and generates about $11 billion in total

direct, indirect and induced impact.

And because they are locally owned,

these cooperatives’ patronage dividends

returned to owners generate another

$600 million in economic impact. 

Many in the co-op world are seeing

this as a time of tremendous opportunity for cooperatives to help strengthen

local and regional economies.

CooperationWorks! President Bill

Patrie agrees. “As people find ways to

work together for mutual benefit,” says

Patrie, “they are reaping huge economic and social rewards. Cooperation is

one of the most powerful development

tools in America.”

Patrie, Malan and others often point

to electric co-ops as examples of how

the business model benefits rural people. These co-ops were created by

farmers and ranchers, who wired rural

America in the early days of electricity

when rapidly growing investor-owned

utility companies didn’t see enough

profit in those sparsely populated areas. 

In contrast to recent corporate scandals, Malan says “electric cooperatives

—transparent businesses owned by their

members — stand as a beacons of light,

integrity and high economic and community value. Clearly, cooperative businesses are an effective development

strategy. To make them work, we need

effective cooperative business development professionals.” 

For more information on

CooperationWorks!, go to: www.cooperationworks.coop, or contact them at

(307) 655-9162; e-mail: cw@vcn.com. 

■

Editor’s note: The principles were first written by members of CooperationWorks! in Madison, Wis., in 1995, and

were recently revised to reflect the consensus of co-op

development practitioners.

1. Cooperative developers subscribe to the highest level of

ethics and shall declare any conflict of interest, real or

perceived, so that they can be a credible source of

objective feedback and an articulate advocate of the

project as needed.

2. There are essential development steps that must be taken in a critical path to success.

3. An enthusiastic group of local, trustworthy leaders is a

prerequisite for providing technical assistance. The

effective cooperative developer nurtures that leadership

by helping them shape a vision that will unite members

and provide ongoing training.

4. Cooperatives only work when they are market driven; the

cooperative developer works to ensure that accurate

market projections precede other development steps.

5. Member control through a democratic process is essential for success. Success also depends on the commitment of the members’ time, financial resources and loyalty to the cooperative.

6. There must be tangible benefits for members.

7. The cooperative’s products and services must generate

sufficient revenue so the effort can be financially selfsustaining. Provisions must be made to share any surplus equitably.

8. Each cooperative responds to its unique economic,

social and cultural context; as a consequence, each

cooperative is different.

9. Cooperative developers link emerging cooperatives with

established cooperatives to facilitate mutual communication and learning.

10. Cooperatives are tools for development and promote

social empowerment and economic goals.

11. Applied appropriately, cooperatives have value to all

population groups and for all businesses and services in

the public and private sectors.

12. Opportunities for human cooperation exist throughout

the world. Cooperative development transcends national boundaries.

■

The Madison Principles 

Professional standards for co-op development practitioners revised
Beverly L. Rotan, Ag Economist, 

USDA Rural Development

as your cooperative fared better, about the same

or worse compared to cooperatives with similar

sales, product mix, etc. Comparisons with other

cooperatives using trends and industry norms

may help to determine whether your cooperative is doing

well or poorly. 

The two tables below contain average financial data compiled from a survey of 263 cooperatives for 2003 and 2004.

Fill in the blanks and compare these benchmarks with your

cooperative’s financial data. How’s your cooperative doing?

How does your local farm supply co-op rate?

MANAGEMENT TIP

H

Compare your farm supply cooperative1 with averages for cooperatives with similar functions.

Size (2003) 2,3 Size (2004) 2,3 Your

Measure/Item Unit Small Medium Large Super Small Medium Large Super cooperative

Sell farm supplies only Number 65 38 22 9 52 43 27 11 _______ _______

Total assets Mil. dol. 1.9 3.8 8.0 15.7 1.6 3.7 7.5 16.5 _______ _______

Long-term debt Thou. dol. 23.8 274.5 574.8 1,895.2 80.7 201.8 495.2 1,611.2 _______ _______

Total liabilities Thou. dol. 559.2 1,326.7 3,257.8 6,334.6 485.6 1,279.0 2,956.3 6,835.2 _______ _______

Total sales Mil. dol. 2.9 6.6 13.9 28.7 2.7 6.4 14.4 30.9 _______ _______

Total service revenue Thou. dol. 73.3 189.0 363.7 718.7 35.7 175.8 190.5 709.0 _______ _______

Total revenue Mil. dol. 3.0 6.9 14.4 28.8 2.8 6.7 14.8 32.2 _______ _______

Net income (losses) Thou. dol. 26.7 109.4 266.1 219.9 49.9 170.3 340.1 863.1 _______ _______

Labor of total expenses Percent 55 53 54 53 55 52 55 54 _______ _______

Patronage refunds received Thou. dol. 4 18.2 45.2 389.3 20.9 61.2 118.6 362.7 _______ _______

Liquidity ratios

Current Ratio 1.96 1.53 1.37 1.38 1.98 1.57 1.45 1.36 _______ _______

Quick Ratio 0.98 0.78 0.74 0.58 0.94 0.78 0.81 0.63 _______ _______

Leverage ratios

Debt Ratio 0.30 0.35 0.41 0.40 0.30 0.35 0.40 0.41 _______ _______

Debt-to-equity Ratio 0.43 0.53 0.69 0.68 0.43 0.53 0.65 0.71 _______ _______

Times interest earned Ratio 2.73 4.20 5.03 5.57 5.16 6.34 7.19 6.47 _______ _______

Activity ratios

Fixed asset turnover Ratio 7.69 6.37 6.25 6.49 9.14 7.42 6.64 7.11 _______ _______

Total asset turnover Ratio 1.56 1.73 1.73 1.83 1.72 1.73 1.92 1.88 _______ _______

Profitability ratio

Gross profit margins Percent 17.96 16.45 16.95 17.71 17.22 15.53 17.69 16.47 _______ _______ 

Return on total assets before

interest and taxes Percent 2.42 3.95 4.52 7.08 4.16 6.01 5.84 6.83 _______ _______

Return on total equity Percent 2.82 6.00 8.06 11.67 6.22 9.35 11.67 11.93 _______ _______

1 100 percent of sales were generated from farm supply sales. 

2 Small = Sales are $5 million or less; medium = over $5 million to $10 million; large = over $10 million to $20 million; and super = over $20 million. 

3 There were 263 cooperatives surveyed in both years. 

4 Less than $1,000. This may be because of write-offs due to regional’s demise.

continued on page 36

Rural Cooperatives / January/February 2006 35
36 January/February 2006 / Rural Cooperatives

Compare your mixed farm supply cooperative1 with averages for cooperatives with similar functions.

Size (2003) 2,3 Size (2004) 2,3 Your

Measure/Item Unit Small Medium Large Super Small Medium Large Super cooperative

Market farm products and

sell farm supplies Number 10 8 21 22 10 8 21 22 _______ _______

Total assets Mil. dol. 1.5 2.7 8.2 19.3 1.8 2.9 7.9 19.7 _______ _______ 

Long-term debt Thou. dol. 144.6 318.0 736.5 2,678.7 108.0 309.2 598.4 2,732.0 _______ _______ 

Total liabilities Thou. dol. 515.8 1,208.8 3,350.7 9,317.6 651.6 1,298.4 2,928.0 9,268.1 _______ _______ 

Total sales Mil. dol. 2.8 5.9 13.7 37.9 2.9 6.4 13.7 43.7 _______ _______ 

Total service revenue Thou. dol. 125.7 345.8 607.4 1,524.7 109.8 340.8 707.1 1,340.6 _______ _______ 

Total revenue Mil. dol. 3.0 6.3 14.6 40.1 3.1 6.8 14.7 45.9 _______ _______ 

Net income (losses) Thou. dol. 42.2 98.9 243.6 766.3 44.6 103.5 274.8 825.4 _______ _______ 

Labor of total expenses Percent 54 50 51 54 51 50 52 50 _______ _______

Patronage refunds received Thou. dol. 28.0 65.4 49.7 283.4 30.0 30.0 132.9 351.6 _______ _______ 

Liquidity ratios

Current Ratio 2.12 1.50 1.40 1.34 1.94 1.49 1.41 1.35 _______ _______ 

Quick Ratio 1.17 0.80 0.67 0.76 1.05 0.78 0.73 0.77 _______ _______ 

Leverage ratios

Debt Ratio 0.34 0.45 0.41 0.48 0.37 0.45 0.37 0.47 _______ _______

Debt to equity Ratio 0.52 0.81 0.69 0.94 0.59 0.82 0.59 0.89 _______ _______

Times interest earned Ratio 6.87 3.35 3.89 4.18 3.84 3.80 4.89 4.21 _______ _______ 

Activity ratios

Fixed asset turnover Ratio 7.21 7.23 6.37 7.03 7.46 7.96 6.59 7.67 _______ _______ 

Total asset turnover Ratio 1.84 2.18 1.67 1.96 1.66 2.33 1.73 2.22 _______ _______

Profitability ratio

Gross profit margins Percent 12.88 14.63 14.20 14.58 13.41 14.81 13.93 13.54 _______ _______ 

Return on total assets before

interest and taxes Percent 3.45 5.43 4.11 5.88 3.54 5.19 4.64 6.25 _______ _______ 

Return on total equity Percent 6.95 10.35 7.07 10.69 5.87 10.42 7.73 10.91 _______ _______

1 50 to 99 percent of sales were generated from farm supply sales. 

2 Small = Sales are $5 million or less; medium = over $5 million to $10 million; large = over $10 million to $20 million; and super = over $20 million. 

3 There were 263 cooperatives surveyed in both years.

How does your local farm supply co-op rate? continued from page 35

32 states receive $21 million

in renewable energy grants 

USDA Rural Development has

awarded 150 applicants with almost $21

million in grants for renewable energy

and energy efficiency projects in 32

states. “Enhancing America’s energy

independence is at the core of President

Bush’s comprehensive national energy

policy. That makes energy conservation

and clean, renewable sources of domestically produced energy more important

than ever,” Agriculture Secretary Mike

Johanns said in announcing the grants.

“Renewable energy is also a major

growth area for American farmers and a

top priority for USDA. Energy conservation and renewable fuels are good for

the environment, the economy, and

farmers’ bottom lines.” 

Johanns made the announcement

prior to a Farm Bill Forum in Salt Lake

City that was part of the nationwide listening tour to gather input from the

public on farm policy. 

The renewable energy and energy

efficiency projects involve a wide range

of wind, solar, biomass, geothermal and

conservation technologies. For example,

Wasatch Wind LLC will receive

$500,000 in funding for phase-1 of a

wind energy generation project to be

located at Spanish Fork Canyon, Utah.

Combined with matching funds, the

USDA grant will result in the construction of a 1.5-megawatt wind generation

tower, the first of 10 towers planned for

the site. 

Synthetic Energy, Inc., of Ketchum,

Idaho, will use its grant of $199,863 to

purchase wind turbines to power a commercial hydrogen generator. ■

38 January/February 2006 / Rural Cooperatives

ture and rural America.”

Sims managed the bank through 15

mergers and acquisitions, the opening

of its first representative office outside

the United States and its first issuance

of preferred stock, which brought $500

million of new investment capital into

the bank.

Sims is chairman of the Farm Credit

System’s Presidents Planning

Committee and co-chairman of HORIZONS, a system-wide customer

research and strategic planning initiative. He is the current chairman of the

National Council of Farmer Cooperatives and past chairman of the Graduate

Institute of Cooperative Leadership,

Lutheran Family Services of Colorado

and the FarmHouse Foundation. He 

is also a member of the Finance

Governors of the World Economic

Forum and a founding member of the

Center for Corporate Excellence in

Vail, Colo.

Engel has nearly 20 years of banking

experience, primarily with HSBC Bank

USA, and 8 years of accounting experience, including an agribusiness specialization, with KPMG and Deloitte &

Touche. During his 14-year tenure at

HSBC, he served in a variety of management and credit positions, including chief

credit officer, before being named chief

banking officer. Engel serves on the

board of directors for the Federal Farm

Credit Banks Funding Corporation,

Farm Credit Leasing Services Corp. and

Financial Partners Inc. He also serves on

the board of trustees for Niagara

University, and is a recipient of the Ellis

Island Medal of Honor.

“We have confidence in Mr. Engel’s

experience, expertise and leadership,”

Orton said. “He has a deep understanding of CoBank and our customers,

as well as a proven track record of

implementing strategic plans and positioning CoBank for success.” 

CoBank, part of the $135 billion U.S.

Farm Credit System, specializes in providing financial and leasing services to

cooperatives, agribusinesses, Farm

Credit associations and rural communications, energy and water companies.

The bank also finances agricultural

exports. 

DFA’s Hanman, Schriver retire;

Rick Smith named new CEO

Two top executives at Dairy Farmers

of America (DFA), headquartered in

Kansas City, Mo., retired Jan. 1. CEO

Gary Hanman and Executive Vice

President Donald Schriver are both

ending careers with DFA and its predecessor co-ops. They were key players in

the creation of the co-op and built it

into the nation’s largest dairy co-op,

accounting for just under one-third of

the nation’s milk supply. Both will continue to advise DFA on various programs and projects. Rick Smith, who

had been president and chief operating

officer, has been named as the new

CEO.

“DFA was created by dairy farmers,

who wanted to take control over their

Long-term debt lower

As mentioned earlier, long-term debt

was lower in 2004. All commodity

groups had a large decrease in longterm debt, other than dairy, farm supply, grain and rice cooperatives. Grain

cooperatives had the largest jump in

long-term debt — larger than dairy, rice

and farm supply co-ops combined.

Grain cooperatives’ long-term debt

increased $74 million, to $458 million. 

Diversified cooperatives had the

largest decline in long-term debt levels,

which dropped $141 million, to $1.7

billion. Diversified cooperatives held

31.7 percent of total outstanding longterm debt.

“Other liabilities” and deferred credits were 7.1 percent higher, climbing to

$1.1 billion. Fruit/vegetable cooperatives were the only commodity group

that saw other liabilities and deferred

credit decline. 

Twenty-three top 100 cooperatives

have minority interest. Minority interest represents the amount of interest

minority-share holders have in a subsidiary of a cooperative that is the subsidiary’s majority share holder. In 2004,

minority interest fell 3.8 percent, to

$909 million. Most of this decline is

attributed to diversified cooperatives.

Total equity was up 6.9 percent, to

$9 billion. Thanks to near record earnings, every commodity group posted

higher equity in 2004 than in 2003.

The largest agriculture cooperatives

retained 70 percent of their after-tax net

margins in both allocated and unallocated equity. This is up from 62 percent

in 2003. 

Allocated equity in the form of stock

and certificates was up 4.4 percent, to

$7.5 billion. The only commodity

group not to show an increase was

grain cooperatives, which saw stock and

certificate values fall 1.8 percent, to

$808 million.

Unallocated equity jumped 22 percent, to $1.5 billion. Unallocated equity

is generally used as reserve for the

cooperative. In 2004, several fruit/vegetable cooperatives had net losses along

with some higher taxes. The unallocated equity absorbed these negative

effects, thus causing a decline of 10.4

percent in the fruit/vegetable unallocated equity accounts. The other commodity groups all showed positive

growth in their unallocated equity. ■

Largest 100 agriculture co-ops post strong margins in 2004 continued from page 27

Doug Simms (left) is retiring in June as

CoBank CEO and will be succeeded by

Robert Engle. Photo courtesy CoBank
Rural Cooperatives / January/February 2006 39

destiny in a rapidly changing business

environment, and Gary Hanman helped

us make that a reality,” said Tom

Camerlo, DFA board chairman and a

dairy farmer from Florence, Colo. He

saluted Hanman for “building a marketing cooperative that can compete on a

global level, while providing a grassroots

structure that ensures dairy farmer input

and control. We look forward to building on that legacy for the benefit of our

farmer members.” DFA today markets

and processes milk for 21,946 dairy

farmer members in 49 states. 

A native of north-central

Missouri, Hanman, 71, has been

CEO of DFA since its creation in

1998. From 1975 to 1997, he

served as CEO of one of DFA’s

predecessor cooperatives, MidAmerica Dairymen, Inc. (MidAm) of Springfield, Mo. Schriver

has also served in his position

since DFA’s inception, and had

led Ohio-based Milk Marketing

Inc. prior to then. 

Smith entered the dairy industry in 1982 when he joined

Dairylea Cooperative Inc. as vice

president and general counsel. In

1988 he became CEO of

Dairylea, the Northeast’s leading agricultural service and milk marketing

organization with 5.5 billion pounds of

milk marketed annually for 2,500 dairy

farmer-members. 

“We are delighted to have a proven

dairy leader like Rick Smith to take DFA

into the future,” said Camerlo, “He

understands the dairy industry, the DFA

organization and, most importantly, the

priorities of the dairy farmer members

whom he serves.”

In August, Smith, who had served on

DFA’s management team since January

2001, was promoted to president and

chief operating officer of DFA. In that

position, he had oversight over all business operations, including economic and

marketing analysis; member, government and public relations; human

resources; fluid marketing operations;

value-added manufacturing; accounting/treasury; and legal and risk management functions. 

James Andrew to lead 

USDA rural utility program

Agriculture Secretary Mike Johanns

has welcomed James Andrew as administrator of USDA Rural Development’s

rural utilities program. Andrew will

administer Rural Development’s electric,

telecommunications and water programs.

In 2005, those programs provided over

$5.5 billion in investment to rural

America. Johanns said Andrew is a strong

leader who “brings a wealth of knowledge and expertise to the position.” 

Andrew was nominated by President

Bush on Aug. 25 and was confirmed

unanimously by the Senate on Nov. 10.

A former president of the National

Rural Electric Cooperative Association,

Andrew served on the board from 1988

to 2004. As president, he led the association’s effort to overhaul education and

training programs for member co-ops. 

A graduate of the University of

Alabama, he is a former small business

owner and banker and helped to manage a family farm. Andrew began his

involvement with rural cooperatives in

1968, when he became director of marketing for Georgia Electric Membership Corporation. Later, he was elected

to serve on his local electric cooperative

board and remained a board member

for 25 years. 

AMPI dedicates rebuilt plant, 

solidifies future in industry 

Associated Milk Producers Inc.

(AMPI) dedicated its rebuilt butter

churning and packaging plant on Dec.

6. The plant, nearly destroyed by a fire

in December 2004, occupies much of a

city block in the south central

Minnesota town of New Ulm, located

in the heart of AMPI’s seven-state

membership area. 

Minnesota Governor Tim Pawlenty

and a host of local, state and federal

officials were on hand to congratulate

AMPI members for reinvesting in the

Minnesota dairy industry. Following

last year’s fire, the cooperative’s

board of directors chose to rebuild

the facility, signaling a long-term

commitment to Midwest dairy farmers and the butter business.

“Minnesotans are strong people who

are resilient in the face of loss,”

Pawlenty said. “The return of this

plant is tremendous news for the

hardworking dairy farmers of this

region and the whole Minnesota

economy. It’s yet another promise of

the bright future that lies ahead of

us.”

Churning and packaging butter

is one way AMPI dairy farmers add

value to their milk. “This plant will

enable us to further diversify our milk

marketing business, offering a complete

line of dairy products to customers,”

said Mark Furth, AMPI general manager.

During plant reconstruction, AMPI

gradually increased production as

packaging equipment was rebuilt.

Production at the plant is near pre-fire

capacity. “Rebuilding gave us an

opportunity to improve our butter

packaging equipment and plant. This

butter plant is now more efficient,

enabling us to increase overall volGary Hanman Rick Smith

James Andrew, with his family members, is sworn in as

the new administrator of the utility programs of USDA

Rural Development by Agriculture Secretary Mike

Johanns (left). USDA photo
40 January/February 2006 / Rural Cooperatives

work at its Ottawa pilot plant, is making

consistent progress at resolving technical constraints. As this new technology

requires a large initial investment to

construct a facility, Iogen may face difficulty securing sufficient private investment capital to launch the first plant. 

Idaho’s growers face challenges and

opportunities. First among the challenges is capitalizing the equipment

required to bale, handle and transport

the straw. Initial estimates are that

growers will need to acquire baling

equipment costing about $7 million,

tractors costing about $11 million, and

handling and hauling equipment totaling an additional $13 million. Certainly,

farmers in the area already own or have

access to some of the required equipment, but without question, significant

investment will be required.

Perhaps the greatest opportunity

offered to farmers, other than that of a

brand new ag market, is the opportunity

to make tremendous gains in productivity over time. Assessments conducted as

part of the VAPG indicate that by shifting from a bale system to a modified loaf

system, growers can significantly lower

per-ton straw harvest costs. Additional

modifications to the transportation system promise further improvements in

efficiency. Put simply, there will be

ample opportunities for farmer ingenuity

to fine-tune the collection system.

For more information , contact:

Duane Grant, Grant 4-D Farms; (208)

531-5149, (208) 431-0006 (mobile),

grant@pmt.org ■

Idaho Straw Value-Added Committee continued from page 31

ume,” Furth said. “This plant will help

us improve our farmer-owned business.” AMPI has about 5,000 members

who annually market more than 5 billion pounds of milk. 

Basin Electric CEO says nation

must develop new power supplies 

Despite many uncertainties, it is time

for the nation to move forward and

build new power supplies for the future,

says Ron Harper, CEO and general

manager of Basin Electric Power

Cooperative in Bismarck, N.D.

Speaking at the co-op’s 2005 annual

meeting, Harper said Basin Electric —

a consumer-owned, power generating

and transmission co-op — must continue to manage its energy destiny, which

translates into economic opportunity

and well-being for its region. Basin

Electric provides electricity to 121

member rural electric

systems in nine

Western and Upper

Midwest states.

“We build plants

because our members

need the power. Our

membership is growing,

our region is growing

and we must grow to

meet the demands (for

electricity),” Harper

said. “As we move forward in our resource

development efforts, we

are seeking to understand the benefits of all

the various types of generation technologies, including nuclear. It is our time to

make the tough calls and break new

ground to ensure a bright future for our

region.”

Basin Electric’s power requirement

projections show a demand for electricity growing at a rate of 3.1 percent

between now and 2019. “That growth

equals the need for 927 megawatts of

generating capacity to meet that member demand,” Harper said. The co-op is

moving ahead on new projects, even

though there are many uncertainties,

such as environmental regulations. 

“One concern I have is for our continued ability to burn coal,” he said.

“There are many that would prefer coal

not be used as a fuel source for any

industrial purpose. They have discounted the benefits of low-cost and reliable

energy to this nation’s economy.”

Fortunately, he continued, there’s a continuing strong recognition of the benefits of coal as a generation fuel by policy

makers and those who believe low-cost

and reliable energy is important. 

Harper said coal gasification will be a

part of our energy future. “A great deal

of the energy bill is focused on gasification and its benefits for the continued

use of coal,” he noted. The environmental community supports gasification

because it provides an option to deal

with carbon dioxide emissions, he said.

However, gasification technologies are

not yet available to reliably generate

electric energy. Dakota Gasification

Co., a Basin Electric subsidiary, has

been successfully operating the nation’s

only commercial-scale coal gasification

plant for more than 20 years. 

State and co-op officials and employees gather for the grand

re-opening of AMPI’s butter plant in New Ulm, Minn., one

year after it was devastated by a fire. Photo courtesy AMPI

Basin Electric Cooperative CEO Ron Harper

says the nation faces a crucial need to

develop new energy sources. Photo courtesy Basin Electric

42 January/February 2006 / Rural Cooperatives

Appellate court applies

reasonableness test

The District of Columbia Court of

Appeals reversed the lower court decision and sent the case back to that

court for trial, Willens and Niederman v.

2720 Wisconsin Avenue Cooperative

Association, 844 A.2d 1126 (DC 2004).

The appellate court focused on the fact

that the notes in question were from

the members to the cooperative, not

the developer. It said that the cancellation of the outstanding notes “...was

conceptually equivalent to the distribution of corporate assets — the uncollected future payment on the notes —

to shareholders of the corporation.

Significantly, it was a disproportionate

distribution. ...the minority of members

who had already paid off their own

promissory notes in full did not receive

their proportionate share of the corporate assets being distributed; they

received nothing, in fact. Meanwhile,

the majority of members whose debts

were still outstanding (including

the...directors other than Willens)

received more than their proportionate

share of the distribution; collectively,

the received all of it....”

The appellate court noted that directors have a duty of loyalty, which means

they must act in the best interests of all

of the members (court’s emphasis). The

court held that a showing by the unhappy members that the directors treated

some members, including a majority of

the board, more favorably than other

members was by itself enough to overcome the cooperative’s motion for summary judgment. Then the court said

that where the directors have a personal

interest in the decision, the trial court

should not apply the business judgment

rule. It should apply a “reasonableness”

test and shift the burden to the directors

to prove that they fulfilled their fiduciary duties. The court concluded that it

was not finding that the board acted

unreasonably under the circumstances,

only that it will have to convince a jury

that its actions were reasonable.

The court also held that the cancellation of the notes may have contradicted a bylaw provision requiring distributions of corporate reserves to be in proportion to the ownership interests. As

bylaws are a contract between the cooperative and its members, the trial court

also erred in granting summary judgment on the breach of contract claims.

Conclusions

The court did not question the deliberateness or the integrity of the directors, and noted that the board had relied

on the advice of counsel in reaching its

decisions. Nonetheless, the court found

that because a majority of the directors

had an interest in the issue before the

board and voted for a policy that

favored some members, including themselves, over other members, they forfeited access to the business judgment rule.

Because member-directors of a cooperative are users and investors in the

association, they will rarely be voting

on matters in which they are personally

totally disinterested. Under the

approach of this court, even if they

exercise thorough due diligence in

arriving at a decision, they may be

forced to defend and prove that their

decision was reasonable if it favored one

group of members over another. This

may be especially true if they are in the

favored group.

While this may be consistent with

the growing concern about directors

exercising their authority in a responsible manner, it places a burden on cooperative directors that often doesn’t apply

to the outside directors who populate

many non-cooperative boards. For

example, a determination to drop a

money-losing line of business or close

an unprofitable facility will likely

impact different groups of members,

and directors, differently. 

Cooperative leaders and advisers will

need to be vigilant in making sure both

board and management decisions are as

equitable as possible. And when a decision that discriminates among the

members is made, the strongest possible

justification for the decision should be

reflected in the minutes and other written records supporting that decision. ■

Legal Corner continued from page 24

South Dakota co-ops merge

The 600-member Farmers Union of

Pierpont and Bristol has merged with

the larger Four Seasons Cooperative.

“It’s hard for a small co-op to compete

in today’s world,” Steve Cameron, manager of Farmers Union Oil Co. in

Pierpont, told the Aberdeen (South

Dakota) American News. “So we decided

to be part of a bigger one.” 

Four Seasons, of Britton, also has

operations in Amherst, Claremont,

Doland, Hecla and Redfield. Four

Seasons will not have a presence in

Bristol. The Farmers Union service station there has been sold. Little change

is expected in Pierpont, where Four

Seasons will offer agronomy services, as

did Farmers Union, the American News

reported. 

USDA commits $1.2 million

for entrepreneurial outreach 

USDA is providing $1.2 million to a

dozen 1890s Land-Grant Universities

to support technology and business

development assistance in rural communities. “The 1890 colleges and universities play a key role in providing technical assistance and business development

leadership to rural minority communities,” Agriculture Secretary Mike

Johanns said in announcing the grants.

“USDA’s partnership with these outstanding institutions significantly

advances President Bush’s commitment

to enhance educational opportunities,

encourage entrepreneurship and create

jobs in rural America.” 

The 1890 Institutions have some of

the finest agricultural science and business education programs in the nation

and, in partnership with USDA, they

have devoted significant resources to

business development and technical

assistance in local communities. 

At the University of Arkansas-Pine

Bluff, for example, funding will be used
Rural Cooperatives / January/February 2006 43

for business enterprise creation, specializing in technology-based products and

services. Funds will also be used to

establish a business incubator that will

house a dozen or more new and startup businesses. Southern University and

A&M College in Louisiana will receive

funds to provide outreach and technical

assistance to entrepreneurs, businesses

and cooperatives in four rural communities and parishes. 

Florida A&M University will receive

funds to provide business and economic

development outreach to eight rural

counties in northern Florida. A complete list of the grants is available at:

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

Chesapeake Fields Institute

launches equity drive

Chesapeake Fields Institute Inc.

(CFI) is launching an equity drive to

raise $1.4 million to purchase property

for an agriculture business park/visitor

center. The nonprofit organization

works to help farm families increase

profits and educate citizens on the

important role agriculture plays in their

community’s health and economy.

CFI’s work has resulted in the development of a community-based food system

enterprise that is owned locally, operated

with environmentally sound practices and

which promotes both human and economic health through its educational

entities. This 501(c)(3) nonprofit organization completed market research and

feasibility studies to identify marketing

opportunities for locally grown grains

and oil seeds. It located several niche

markets and is completing its fourth year

of shipping specialty identity-preserved

soybeans to Japan. In 2004 this project

added $60,000 above commodity-priced

beans to the local economy. 

CFI launched the for-profit

Chesapeake Fields Farmers LLC in

2003, which has developed a line of

artisan breads, soy and popcorn snacks

now marketed in the Chesapeake Bay

area. Chesapeake Fields Farmers

Cooperative Inc. was incorporated in

August as the crop production arm of

CFI to give farmers a way to increase

their profits through whole-grain sales

and value-added products. The common mission, preservation through profitability, links the three Chesapeake

Fields organizations together, but they

are three distinct entities, each with its

own function, purpose, mission

approach and leadership. 

Chesapeake Fields’ three entities have

the common goal of developing an agriculture business park to house their

operations and develop a visitor center

to tell agriculture’s story. The visitor

center could be a key economic business-driver for the Delmarva (Delaware

and Eastern Maryland and Virginia)

region’s destinations and attractions. 

“Since its inception, CFI has recognized a need for a significant multiplier

to educate citizens of the importance

and value of preserving and investing in

America’s existing farmlands,” explains

John Hall, CFI’s president.

For more information, visit:

www.chesapeakefields.com, or call (410)

810-2082. 

CHS reports record sales and income 

CHS Inc. reported record net income

of $250 million for fiscal 2005, marking

its second consecutive year of record

earnings and the highest ever recorded

by a U.S. agricultural cooperative. In

2004, CHS earned $221.3 million.

Fueled by higher energy prices, net

sales of $11.8 billion in 2005 also set at

record for the second straight year.

That compares to $10.8 billion in sales

for fiscal 2004. 

CHS Chairman Michael Toelle, a

Browns Valley, Minn., producer, said

that — based on the record earnings —

CHS expects to return a record $151

million to owners in cash patronage,

equity redemptions and preferred stock,

beginning in January.

“During my nearly 30 years with this

organization, I can’t remember a year in

which we made so many pivotal decisions,” John Johnson, CHS president

and CEO, told the 2,500 members and

guests who gathered for the cooperative’s annual meeting in Minneapolis. 

Key business decisions included:

investing $325 million in its Montana

fuel refinery to yield more gasoline and

diesel from crude oil; expanding its role

in renewable fuels manufacturing with

an investment in US BioEnergy; selling

its Mexican foods production business

(which had a loss of $16.8 million) to

instead focus food manufacturing

efforts in its Ventura Foods LLC joint

venture and in supplying grain and

grain-based ingredients to other food

companies; and supporting the conversion of the cooperatively owned CF

Industries fertilizer joint venture into a

publicly traded company, of which CHS

remains both a minority owner and

(through Agriliance LLC) a customer.

CHS earned $9.6 million for its sale of

shares in CF Industries. 

Strong refining margins, combined

with improved performance by CHS

lubricants, contributed to the highest

energy segment earnings in company

history. The company’s Ag Business

segment — consisting of its grain marketing, country retail locations and 50

percent ownership in the Agriliance

LLC — earnings were up 46 percent.

CHS Processing operation results

were down 55 percent. Within that segment, earnings increased for the co-op’s

50 percent ownership of the vegetable

oil-based food manufacturer Ventura

Foods. However, earnings in oilseed

processing declined due to weak crush

margins; wheat milling results fell due

to overcapacity and soft demand. ■

CFI President John Hall, left, and Kent

County (Maryland) Commissioner and

grower Roy Crow review the visitor center

site plan. Photo courtesy CFI 
44 January/February 2006 / Rural Cooperatives

ture, Schriver said. However, later

financing was fully secured by the venture’s own assets, with no guarantees

by the partners. DairiConcepts currently has annual sales of about $400

million.

Reducing transportation costs 

Another successful DFA alliance is

with Ireland-based dairy processor

Glanbia PLC. DFA was looking for

ways to deal with surplus milk production in the Southwest, the transport of

which out of the region was costing at

least $40 million per year. 

Glanbia is a major international

cheese manufacturer, with annual sales

of more than 2.3 billion euros. It is the

largest cheese producer in the

Northwest United States and a major

producer of lactose, whey protein and

other bulk dairy products. DFA entered

into a cheese making venture called

Southwest Cheese Company LLC.

Unlike the DairiConcepts venture,

DFA is not involved in a direct relationship with Glanbia, but instead shared

participation through an agreement

with other American cooperatives,

including Select Milk Producers, representing dairy farmers in the Southwest.

DFA holds a 30 percent share in

Southwest Cheese, while Glanbia controls 50 percent. 

Governance of the venture reflects

the ownership split, with three board

members from Glanbia and three from

the co-ops.

The $190 million Southwest Cheese

processing facility, in Clovis, N.M.,

began operations in December, and is

expected to generate $350 million in

sales annually while processing 7 million pounds of milk per day.

Changing negative product perception

None of the conference presenters

portrayed working in the international

marketplace as easy. David Fuhrman,

president of Foremost Farms USA, said

that the export market continually presents challenges. Foremost exports mostly whey, beginning with the 1984 acquisition of a firm already engaged in that

business. Its largest whey customer is

China.

Fuhrman says that the co-op had to

overcome a negative reputation of U.S.

whey, because of the tendency of U.S.

producers to “dump” inferior whey

product on foreign markets, while keeping high-quality product for domestic

sale. Other challenges include packaging

the product to protect quality over the

long distances and less than ideal conditions of overseas transport.

Paperwork on an order must be flawless with foreign customers, said

Fuhrman, or they may think the

exporter is trying to “pull a fast one.” In

addition, local cultural quirks can add

problems. In Mexico, for example, entry

into ports is sometimes complicated by

requests for bribes. In China, “negotiations never seem to end,” he said,

adding that Chinese customers often

look for ways to deduct from the agreed

price even after delivery.

Regarding quality, said Fuhrman,

“Expectations are not the same as specifications,” meaning that customers may

not be satisfied even if the product

meets the letter of the agreed specifications. While the firm receives complaints about less than 1 percent of its

product sold domestically, it gets complaints on about half of its overseas

shipments. In such an instance, he said,

“The customer is always right.”

Overall, exporting product is

“tedious, time consuming, and leaves no

margin for errors,” Fuhrman said. Despite the problems and the fact that the

co-op receives less than 1 percent of its

revenues from exports, exporting has

been profitable, and has improved

Foremost’s overall business.

Capper-Volstead & foreign trade

USDA Rural Development

Cooperative Programs law specialist

Donald Frederick explained how the

Capper-Volstead Act's limited anti-trust

protections affect cooperatives which

accept foreign producers as members.

Frederick said that Capper-Volstead is

silent about whether non-domestic producers may join a U.S. co-op, but that

legal rulings and precedents have endorsed such relationships. 

Given the increasingly concentrated

and global economy, large buyers are

the ones with substantial market power,

Frederick noted. They can negotiate

down prices paid to farmers by playing

farmers in one country against those in

other countries who produce the same

product. Foreign members in farmer

marketing cooperatives and alliances

with foreign producer associations are

important tools for creating economic

balance in the markets of the 21st century. ■

program to help clear the market.

Cheese prices have not lingered below

CWT’s target level of $1.40 per pound

since the program began. As 2006

begins, and butter prices begin to sag,

CWT has also facilitated the sale of

butter for the first time.

Apart from helping to improve the

economic situation for every dairy

farmer in the country, CWT has helped

to counter nay-sayers who said farmers

wouldn’t be willing to work collectively

on such a program. As traditional government-run farm programs face the

twin pressures of federal budget limitations and potential World Trade

Organization restrictions, self-help programs such as this will be an important

tool for dairy farmers in the future.

— Jerry Kozak, CEO

National Milk Producers Federation

Commentary continued from page 2

Foreign Affairs continued from page 23
Rural Cooperatives / January/February 2006 45

Dairy knowledge in

short supply in Congress 

U.S. Rep. Devin Nunes, who grew

up on a Tulare, Calif., dairy farm, said

he has his work cut out for him representing the dairy-intensive San Joaquin

Valley in the Capitol, where it often

seems that “there are only about three

people who understand U.S. dairy policy.” That was brought home to him

when, after just two weeks on the House

Ways and Means Committee, he was

named as its designated dairy expert. 

“That’s kind of scary,” said Nunes,

whose Fresno-based district is the

nation’s largest agricultural district

(based on farm income). “Few people in

Washington understand agriculture,

and fewer still understand dairy.” 

There are “strong feelings in

Washington to throw out” the existing

dairy program, and “that sentiment

seems to be growing,” he warned. It

will take a strong coalition to defend

the program, Nunes said, praising

NMPF for its efforts to bring the dairy

industry together on the legislative

front and for its accomplishments with

the CWT program.

Nunes said he is sponsoring a bill

that would provide up to $300 million

to help spur growth of the U.S. MPC

(milk protein concentrates) industry,

and is supporting another bill that

would impose a tariff on imported

MPCs until the U.S. MPC industry is

better established.

The United States needs to look

closely at what New Zealand did in

building and subsidizing MPC plants —

a strategy which Ireland and Holland

have followed suite on, Nunes said. If

the United States does not do something similar, it will put its dairy industry at a disadvantage, he warned.

Nunes also spoke of the energy crisis

facing the nation, noting that renewable

energy — even growing as rapidly as it

is — can do only so much to relieve the

need for oil. He expressed the fear that

without more action, “someday we may

be back to milking cows by hand.”

He recounted a trip to Alaska to tour

a region where new oil fields could be

tapped — a proposal that has sparked a

bitter fight with wilderness advocates.

Nunes described flying for two hours

over the region without ever seeing a

single animal or person. Out of this vast

region, Nunes said drilling would occur

on just 2,000 acres, but would produce

enough oil to fill the Alaska pipeline for

30 more years and meet 5 percent of

the nation’s annual petroleum needs.

Nunes agreed with one questioner

that the lack of new U.S. oil refineries

is part of the problem, but he said this

mostly contributes to short-term oil

price spikes. The main long-term cause,

he said, is still over-reliance on Middle

Eastern oil. 

Pacific Rim seen as

world economy hot spot

Jeff Thredgold, noted economist

with Thredgold Economic Associates

in Utah, provided a lively, wide-ranging outlook on the national and global

economies. He disputed those who say

the U.S. economic recovery has been a

“jobless one.” Small business creates

most new jobs, and was largely responsible for 2.2 million new jobs created

last year, he said. U.S. worker productivity was up an average of 3.7 percent

the past three years, the highest

growth rate in 50 years. Further, he

continued, the nation has enjoyed 10

consecutive quarters of economic

growth exceeding a 3 percent annual

rate, after inflation. 

Just 12-14 years ago, the U.S. economy was “a bloated dinosaur — the Germans and Japanese were kicking our

tails,” Thredgold said. “Today, we have a

re-charged, flexible, dynamic economy.” 

The Internet has been a tremendous

boon to business, he said, helping to

reduce the cost of doing business globally by $1.25 trillion during the past 3

years. 

The economy is increasingly rewarding those who attain higher education,

Thredgold said, noting that in 1980,

college graduates averaged 25 percent

more income than those with only a

high school education. By 2005, college

graduates made 85 percent more, on

average. 

Thredgold said the world economy

is doing well, having grown 4 percent,

after inflation, last year, and is poised

for similar growth in the coming year.

Two-thirds of world economic growth

in the next 20 years will likely occur in

the Pacific Rim nations of Asia, he predicted. 

Japan still accounts for 60 percent of

that region’s economic output, and it

was clearly the economic victor of the

1980s, Thredgold said. However, he

called Japan the “economic basket case

of the 1990s.” Japan has lately been

making some progress in restoring its

economy (thanks mainly to increased

exports to China), but Japanese banks

are still saddled with $500 billion in bad

loans. The Japanese national debt is 150

percent the size of its economy, vs. 63

percent in the United States. He called

that the worst debt level in the history

of the world. Japan’s salvation has been

its people’s $13 trillion in savings, he

noted. 

China’s economy has grown an average of 9 percent, after inflation, during

the past 25 years, the largest sustained

gains in history, although that growth

occurred from a very low starting baseline, Thredgold said. China’s economy

is so hot that one in four major building

cranes in the world have been working

in Shanghai, which he said has been

described as “New York on steroids.” 

Virtually all of that growth, however,

has been along China’s east coast. The

interior of the nation is still home to

about 850 million struggling farmers,

and 115 million Chinese people are

constantly on the move looking for

jobs, Thredgold said. 

India (while still saddled with massive poverty) now has the largest middle

class in the world and has more IT

graduates annually than any other

nation, Thredgold said. 

Europe is struggling along with

“pathetic” 1 percent annual economic

growth, he said. ■

Trade, Farm Bill, co-op structure challenges eyed at dairy conference continued from page 19

By Peter Thomas, USDA 

SDA Rural

Development’s

Cooperative Programs

experienced another successful year in 2005, and I

hope your co-ops did too. As we begin

2006, I want to discuss some changes in

a couple of our funding programs

that help agricultural cooperatives

in rural America: the Value-Added

Producer Grant (VAPG) and

Rural Development Cooperative

Grant (RCDG) programs. Due to

increased Congressional support

for fiscal 2006, the VAPG program was appropriated $19.5 million, the RCDG program received

$4.5 million and an additional $1.5

million was appropriated to assist

minority producers.

Rural Development is making

changes to both programs in an

effort to make them more accessible and to improve their overall

administration. These changes

were developed from applicant input,

which included surveys and teleconferences regarding program requirements

and administration. Comments from

Rural Development field office employees were also considered, as they work

directly with the program applicants. 

One of the most immediate changes

in the Value-Added application process

is the opening of the application window. The application window opened

Dec. 21, 2005, and will close March 31,

2006. Not only does this provide producers with an extended application

period, the window was timed to meet

the demanding time schedule of agricultural producers. 

In past years, this process began during the spring, with applications due

during the summer. However, this year

it was published during the winter,

when most producers are not in the

middle of their planting or harvesting. 

For the first time ever, USDA Rural

Development has also established procedures to allow applicants who submit

substantially complete applications by

the deadline to submit any forgotten or

incomplete items after the application

deadline. An electronic application template is also available to assist applicants

in submitting a complete application.

Our goal is to have a significantly higher percentage of completed applications, ensuring that all eligible projects

have the opportunity to compete for

these critically important grants. 

Based upon applicant feedback, we

also increased the maximum amount of

grant award for working-capital funds,

from $150,000 to $300,000. In addition,

a separate allocation of funds up to $1.5

million is available for grant requests of

$25,000 or less. These grants are

designed to assist agricultural producers

who need just a few dollars to aid in

their value-added venture. 

Many of the same positive

changes made in the ValueAdded program will be introduced in the Rural

Cooperative Development

Grant program. Once again,

based upon applicant feedback, we intend to open the

FY 2006 Rural Cooperative

Development Grant program

application process much earlier in the fiscal year. 

We will also introduce procedures to allow applicants

who submit substantially

complete applications by the

deadline to submit any forgotten or incomplete items after the

application deadline and will make an

electronic application template available.

Much of the duplication of program

requirements that appeared in previous

applications has been eliminated.

We believe these changes will significantly improve the application process

and allow for the awarding of more

grants. As always, our state and national

office staffs are available to answer any

questions. Happy New Year, and best

wishes for a healthy and successful 2006.

■

Rural Cooperatives / January/February 2006 47

Rule changes should ease applying

for USDA co-op grant programs 

INSIDE RURAL DEVELOPMENT

U

Idaho wheat and barley straw may someday be processed into

ethanol, aided by a VAPG from USDA Rural Development. For

more on this project, see page 30. Photo by Maurice Hladik
48 January/February 2006 / Rural Cooperatives

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