Rural

COOPERA COOPERATIVES

USDA / Rural Development January/February 2005

How to keep

members from

flying the coop

page 4
2 January/February 2005 / Rural Cooperatives

As the second term of the Bush

administration begins, I want to

express USDA Rural Development’s continued commitment to

the positive agenda the President

has outlined for rural America. A

major component of the administration’s domestic agenda continues to be forming a new energy

policy with the development of

renewable energy technology playing a key role. This ties into our

bio-based and bio-energy programs. Both the nation’s farmer

and utility cooperatives are playing

a major role in this effort, and that

role will certainly grow in the years

ahead. 

This effort includes the

Renewable Energy Systems and

Energy Efficiency Improvements

Grant Program (9006) from the

2002 Farm Bill. This initiative

makes it possible to finance the

purchase of renewable energy systems and to make energy improvements for agricultural producers

and rural small businesses through

grants offered through our business

programs. Other efforts include

USDA Rural Development electric

loans that encourage the inclusion

of renewable energy sources to help

power America’s rural electric grid. 

To help achieve this goal, USDA

Rural Development has forged a

partnership with the Environmental Protection Agency to promote

development of new, agriculturalbased renewable energy projects

(see Newsline, page 40). This program will benefit the environment,

will help reduce our dependence on

foreign oil and will boost revenues

for farmers and their co-ops, which

in turn bolsters the entire rural

economy. 

President Bush has said America

must have an energy policy that

plans for the future, but meets the

needs of today. This will be our

goal as we finance new technologies needed to convert bio-mass

into bio-based products and bioenergy in a manner which is costcompetitive in large national and

international markets. U.S. production of ethanol from corn was 60

million gallons in the mid-1970s; in

2004, the U.S. produced an estimated 3.4 billion gallons. 

USDA has also made great

progress in the implementation of

the President’s management agenda, including the e-Government

Initiative; our services are now

available on the World Wide Web.

As a result, our programs are more

user-friendly to consumers and producers.

In the 1890 Land Grant Colleges

and Universities Initiative, we added

30 new 1890 scholars in December.

Our goal is to hire some of these

1890 scholars for exceptional careers

here at USDA. 

One of the more competitive

programs available through USDA

Rural Development’s Cooperative

Programs is the Value-Added

Producer Grants (VAPG). These

grants consist of planning or using

working capital to establish a valueadded agricultural marketing venture, many of which are owned by

cooperatives. For an example, see

the Value-Added Corner on page

15 of this issue for a look at Golden

Ridge Cheese Cooperative in Iowa

and the article about Crooked Bow

beef strips on page 7. Last year,

approximately $13.2 million in

grants were available for up-andcoming cooperatives in rural

America.

As you can see, our USDA Rural

Development team is committed to

providing strong leadership to

increase economic opportunities

and improve the quality of life for

citizens living in America’s rural

communities. We look forward to

working with you to bring such

opportunities to you and your

community. ■

— Peter J. Thomas,

Administrator, 

Business & Cooperative Programs, 

USDA Rural Development

COMMENTARY

Rural America’s role in the energy economy 

President Bush has

said America must

have an energy policy

that plans for the

future, but meets the

needs of today.
Rural Cooperatives / January/February 2005 3

Rural COOPERATIVES (1088-8845) is published

bimonthly by Rural Business–Cooperative Service,

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Building, 14th and Independence Avenue, SW,

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

(voice or TDD). USDA is an equal opportunity

provider and employer.

Gilbert Gonzalez, Acting Under Secretary,

USDA Rural Development

Peter Thomas, Administrator, 

Rural Business-Cooperative Service

Roberta D. Purcell, Deputy Administrator,

USDA Rural Business-Cooperative Service

Dan Campbell, Editor

Vision Integrated Marketing/KOTA, Design

Have a cooperative-related question?

Call (202) 720-6483, or

Fax (202) 720-4641, Information Director,

This publication was printed with vegetable oil-based ink.

Rural COOPERA COOPERATIVES

January/February 2005 Volume 72 Number 1

p. 4

p. 8

p. 22

p. 27

FEATURES & NEWS

4 Flying the coop 

Why members leave co-ops and ways to prevent it 

By Catherine Merlo 

8 Leaving home? 

Reasons vary for co-op conversions; critics remain wary

By Nancy Jorgensen 

12 Co-op stock exchange 

Why choice of trading rules matters 

for new-generation co-op stockholders

By Steven J. Holland & Robert King 

17 Of necessity & invention 

Conference shows diversity of responses 

by co-ops to changing markets 

By Kimberly Zeuli 

22 Charley’s Angels 

Co-ops show true colors sending aid to 

Hurricane Charley-ravaged Southern states 

By Stephen Thompson 

26 Retail co-ops advised to foster member 

identification, not force conformity 

By Janet Ciccone 

27 Paper or plastic? 

For single-serve milk market, the answer is plastic 

By Dan Campbell 

DEPARTMENTS

2 COMMENTARY 

15 VALUE-ADDED CORNER 

20 LEGAL CORNER 

34 NEWSLINE 

44 NEW USDA CO-OP PUBLICATIONS 

On the Cover:

Our cover story discusses strategy for preventing members from “flying the

coop.” Greg Spalenka’s art has also been featured in Time, Newsweek, The

Wall Street Journal, New York and Los Angeles Times and many other publications and books. To see more, visit: www.spalenka.com. 
4 January/February 2005 / Rural Cooperatives

By Catherine Merlo

Editor’s note: Merlo is a freelance

writer and former co-op communications

director based in Bakersfield, Calif., who

specializes in issues pertaining to cooperatives. 

n August 2002, grower

Greg Palla rose before

the board of directors of

a major regional marketing cooperative and

made a startling announcement.

Standing before the group during

executive session, Palla announced he

was resigning from the 50-member

board after nearly 10 years as one of its

directors. 

“They were shocked,” Palla remembers.

But they shouldn’t have been, says

the 49-year-old, whose family had

been with the farmer-owned co-op

since the 1930s. Palla himself had been

a member for more than 20 years.

“For months, I had been urging the

co-op to reconsider its process for

selecting a new chief executive officer

(CEO),” he says. “It was faulty. Also,

the co-op had exhibited poor performance. I felt the board did not have

proper oversight on the co-op’s policy

or management.”

The co-op, accustomed to annual sales of $500 million and higher, had come through a rough

marketing season the year

before. For the first time in

decades, it had been forced to ask for

a return on payment advances made to

members. That had caused widespread

consternation. Coincidentally, the coop’s long-time CEO was preparing to

retire, and the search had begun for

new management. 

Palla had expressed his views about

the board’s “inherent deficiency in its

oversight of management.” He had

recommended more emphasis on

strategic planning. He had even suggested the board consider adding an

outside director to offer a different

perspective. He had been met with

what he calls “cross looks.”

“The board was not inclined to

hear my message,” says Palla. 

Changes weren’t made. Six

months after his resignation from

the board, Palla ended his connection with the association during the

co-op’s annual membership sign-out

period.

Flying the coop

Why members leave a co-op and ways to help prevent it

I
Rural Cooperatives / January/February 2005 5

Lack of response prompts

co-op members to quit

Palla wasn’t alone in his departure.

Three more long-time directors soon

resigned from the co-op’s board and

membership. Numerous members also

withdrew, angry and disappointed over

having to pay back the advances the

co-op had overpaid on its marketing

pools. 

The co-op’s management troubles

deepened. Nine months after hiring

him, the board fired the new CEO. 

The experience hasn’t soured Palla

on co-ops. He remains a member of

two other co-ops and serves as board

chairman for one of them. 

“I still believe in growers banding

together to enjoy economies of scale

and have ownership in their particular

activity,” he says. “But what happened

made me aware there are inherent

concerns at co-ops.”

Today, the co-op Palla left has

rebounded with a new CEO, a return

of many previously departed members

and successful results. But both Palla

and the co-op have learned hard

lessons from the experience.

Reality of member departures

The case illustrates the reality that

few cooperatives publicly like to talk

about: members do grow unhappy and

withdraw from their cooperatives.

Certainly, not all member withdrawals

stem from frustration. A co-op can lose

members when they die, retire or leave

the business.

But co-ops also lose members for

more sharp-edged reasons, such as

poor performance by the association,

questions about its credibility or leadership, or inadequate products and services. In an era of fewer farmers and

farmer-owned co-ops, membership loss

can pose serious problems for a co-op.

According to USDA’s Farmer

Cooperative Statistics for 2002, U.S.

farmer cooperatives number 3,140,

down 89 from 2001. This includes

losses from mergers, closures and conversions. Between 1993 and 2002,

memberships in U.S. farmer cooperatives dropped from 4 million to 2.8

million. This decline reflects the

decreasing number of farms, farmers

and ranchers in the United States. But

these numbers also drive home the

importance of sustaining cooperative

membership when the overall pie

shrinks — at a time when volume matters and markets have become more

competitive. 

Performance first

A co-op’s performance is paramount

in retaining members, says Dan

Vincent, president of Pacific Coast

Producers (PCP), a 176-member fruit

and vegetable processing and marketing cooperative based in Lodi, Calif.

Vincent, who became PCP president in June 2004, says, “The best

advice I’ve had came from our previous

president: Run the co-op like a business. In today’s market, members are

investing in us and expecting a decent

return. If they’re not getting it, they’ll

take their business somewhere else.”

Palla agrees. “A co-op can buy ads

and give out hats and toys, but performance speaks much more loudly,” he

says.

Problems can develop when members perceive their co-op isn’t doing as

well as a competitor or the open market, or if its performance has lagged

behind the industry average for three

or four years.

“A co-op can lose members when

there’s no real or perceived value in the

co-op,” says Joe Huffine, manager of

member services for Tennessee

Farmers Cooperative, a federated farm

supply co-op with 64 members representing 70,000 farmers.

“It’s very important to evaluate the

services offered to determine if they’re

being utilized or meeting current

needs,” Huffine says.

Not meeting members’ needs can

create indifference to the co-op, adds

Huffine. Members can also drift away

when they perceive the co-op is not

focused on profitability or future

growth and needs.

“When you’re not returning

patronage, when they see little or no

value or your co-op’s services are not

compatible with their needs, members

can become disenchanted,” Huffine

says. “Then the co-op becomes like

any other business and members may

seek out someone else. Perceived indifference to members can create a wall

of obstruction for any business, especially a cooperative.”

Co-ops that have strayed too far

from their original purpose or aren’t in

touch with member needs, Huffine

adds, “are often the co-ops with the

most problems and least loyal membership.”

Contending with competition

Co-ops also may lose members to

competing businesses or even other

farmer-owned organizations. 

“Competition is legitimate and can

be healthy for business,” Huffine says.

“But it can also be a death sentence for

co-ops not willing to adapt to current

membership and market demands.”

He points out that many co-ops no

longer have just local competitors to

contend with. With the advent of

Co-ops that have

strayed too far 

from their original

purpose or aren’t in

touch with member

needs “are often the

co-ops with the most

problems and least

loyal membership.”

—Joe Huffine
6 January/February 2005 / Rural Cooperatives

national companies through attrition

and consolidation, competition has

widened to a national scope. Farmers

and ranchers can even turn to the

Internet for products and services. All

that’s created an atmosphere of “survival of the fittest,” Huffine says.

Competitors looking to boost their

market share can do more than offer

promises of better prices, products or

services. They can sabotage a co-op’s

efforts, undermine its relationship with

members or deliberately attempt to

woo them away. 

Dr. Shermain Hardesty, Extension

economist for cooperatives and marketing at the University of California

at Davis, has seen that happen between

co-ops.

“There were two rival co-ops in

California,” Hardesty says. “One co-op

had been struggling, and the other said

all kinds of negative things about it.

This just added fuel to the fire.”

The negative campaign created

more doubt in the minds of members

at the struggling co-op. As a result,

Hardesty says, many members left the

troubled co-op, further weakening it.

In time, it closed its doors for good. 

The role of the board

A co-op’s board plays an important

role in member retention. In fact, “the

board can make or break a co-op,”

Huffine says.

“A board member plays a significant

role because he or she represents

members,” Hardesty agrees. “It’s his or

her duty to be in touch with them.”

“If board members are fulfilling

their responsibilities so that a co-op

achieves its performance objectives,

why would a member go anywhere

else?” asks Palla.

But too often, board members fail

in their responsibilities.

“The majority of board members

are often there for the ride,” says Palla.

“Too many directors view their role

more as an honor rather than performing a fiduciary responsibility representing the membership. It becomes a

social club.”

That happens frequently because

farming communities, where directors

usually live, are small and close-knit,

Palla says. Farms are so often steeped

in family tradition that it can be hard

to separate the family farm from the

co-op. 

Palla recalls hearing one long-time

director emphatically state that the coop’s board had only to hire a CEO, not

question his or her management decisions.

“That doesn’t sit right with me,”

Palla says. “If a board member is not

questioning management, he’s not fulfilling his fiduciary responsibility.”

Further, he says, “I maintain that

the board needs to review its strategic

plan and the performance of its CEO

on an annual basis. That is the minimal fulfillment of a director’s fiduciary

responsibility.”

Communications are essential

Whether it’s between directors and

members, or directors and management, or management and members,

communications are essential to solid

member relations. Forthright and

straightforward communications are

the best way to earn members’ trust

and support, says Palla.

“Make sure the membership understands how the co-op is attaining its

level of performance,” says Palla. “If

the performance is less than targeted,

explain why — not with excuses, but

with reasonable, plausible explanations.

That’s the best way.”

The small service co-op where Palla

serves as board chairman is doing a

“great job” of member retention, he

says, despite fewer producers as a

result of retirements and consolidation

of farming operations. Its success is

partly due to a board that “sets aside

its own personal objectives in favor of

the co-op’s objective.” 

The co-op also does a good job

communicating its performance status

to members. “The books are open to

them,” Palla says. “We go through all

financial statements in detail at least

In addition to delivering a strong financial performance, co-ops can help

retain their members in other ways, such as: 

• Listening. Board members and management should listen to members to be

aware of what they want and need. Create opportunities by holding meetings or roundtable discussions or simply visiting with members.

• Educating. Whether it’s through face-to-face meetings or a regular newsletter, keep members informed about performance, policy decisions, co-op

procedures or industry development. “Many co-ops today have members

who are third and fourth generation owners,” says Joe Huffine of Tennessee Farmers Cooperative. “The younger generation has no sweat equity

in the co-op. It’s always had the co-op in the community. It’s imperative for a

co-op to educate the next generation of members and employees.”

• Being involved in the community. “If you’re an integral part of the community, people will support you better,” says Huffine. “Publicize the good you do

for your community.” Those efforts might include scholarships, support of

youth organizations like FFA or 4-H, or volunteering activities by co-op

employees. 

• Taking a fresh look. A co-op may need a face lift in its mission, strategy or

marketing efforts. Maybe it’s time to reintroduce your co-op to its community with a name recognition campaign. Annual meetings may also need some

revising. “Co-ops need to take a close look at their annual meetings,” says

Huffine. “Are you getting enough bang for your buck at them? Are you happy

or satisfied with them?” He suggests co-ops may want to plan annual meetings with more member education on the agenda. ■

Actions that help retain members
Rural Cooperatives / January/February 2005 7

he newest addition to

the made-in-Montana

pantry, Crooked Bow

smoked beef strips, had

an impressive debut in

September when it was sold at the

Smithsonian Institution’s new

National Museum of the American

Indian in Washington, D.C. The

museum gift shop’s first consignment

of 200 packages sold out almost

immediately. Crooked Bow’s beef

strips — a very old recipe in a brand

new package — are made of grass-fed

beef raised by Salish, Kootenai and

Pend O’Reille tribal members of the

Flathead Native Agricultural

Cooperative. The beef is handstripped and seasoned with locally

grown huckleberries and chokecherries, a touch of apple cider vinegar

and honey, then smoked over alder. 

Helping in the development of the

product was a $100,000 Value Added

Producer Grant awarded in 2002 for

working capital for the project by

USDA Rural Development. 

The agricultural cooperative is a

result of work done by Joel Clairmont

of the Salish tribe, who is the Montana

State University Extension agent on

the Flathead Reservation. Clairmont

was “the key player” in pulling together the cooperative, according to Jan

Tusick, a manager with the Mission

Mountain Market Cooperative

Development Center in Ronan. Five

years ago, Clairmont began talking

with the ranchers about ways they

might combine forces and develop

value-added products from what they

produce.

The co-op now has six members,

owns the Crooked Bow brand and its

members raise the beef that is smoked

and turned into strips. Other Flathead

Reservation producers have shown an

interest in joining. The beef strips are

prepared and packaged in Mission

Mountain Market’s licensed commercial kitchen and certified organic food

processing center. The facility was created to help area entrepreneurs test,

develop, refine and prepare and market

value-added food products of all kinds.

A nonprofit entity, the market is

also a business incubator that provides

expertise on food-related regulatory

issues and business and cooperative

development, including possibilities

for capitalization. Other MSU faculty

helped develop the product, adapt the

original recipe for commercial production, and train the people who

prepare the strips in food handling

and food safety. The Crooked Bow

product line is to be enlarged soon

with the addition of a beef stick product. For more information, contact the

Flathead Native Agricultural Co-op,

(406) 745-7500, ext. 2202. ■

once a year with members.”

Whether a co-op is large or small, it

needs the support of its members to

survive. Member retention takes work,

commitment and a willingness to adapt

to the needs of your members, Huffine

says.

“If you’re losing members, if you’re

not getting growth or your margins are

eroding, it’s time to reevaluate the benefit of your co-op to members today,”

he says. “Maybe you need a third party

to analyze your co-op. Problems may

be invisible to us but obvious to others.

It may be time to adopt a new business

or marketing strategy.”

As for Palla, he remains confident

of his decision to leave the co-op. “I

have no regrets whatsoever,” he says,

“except that I wasn’t able to be more

effective in getting the board to recognize the problems I saw. The rankand-file member who’s not inside the

leadership is dependent on those leaders to lead. Having seen it from the

inside, I can say it’s often not adequate

at all.” ■

USDA, MSU Extension help 

Crooked Bow beef take a bow 

T

Very old recipe, brand new package: the

just-introduced Crooked Bow brand

smoked beef strips. MSU photo by Erin Raley.
8 January/February 2005 / Rural Cooperatives

By Nancy Jorgensen

Editor’s Note: Jorgensen worked for

CoBank in Denver for 13 years before

establishing her own communications and

marketing consulting business in

Pomerene, Ariz., which specializes in cooperatives. 

o-op conversions aren’t

exactly sweeping the

nation — only a handful

have converted to limited

liability companies (LLCs)

or other business forms in recent years.

And of these, most proudly say that

they are still producer controlled. 

Regardless, co-op conversions concern some co-op leaders, who say the

risk is great that converted co-ops will

eventually wind up under the control

of outside investors. 

Promoters of the concept counter

that co-op conversions give producers

another avenue for raising capital

needed to become players in valueadded agriculture markets and can help

them gain other operating efficiencies.

The debate involves many of the

same principles and issues that arise in

the sale of co-ops to non-cooperative

businesses, recent examples being the

sale of Minnesota Corn Processors and

the now-scuttled sale of FCSAmerica

(see Nov-Dec. issue of this magazine).

Are producers sacrificing their longterm good and that of producers who

follow them for short-term gains? Is

the conversion being undertaken primarily for the benefit of management

staff or a select few members with

large amounts of stock, rather than the

overall membership? Or will the conversion open the door to greater marketing clout for producers? Should the

definition of “cooperative” be expanded to include producer-owned LLCs as

a new type of co-op, and should they

receive Capper-Volstead protection? 

These are just examples of the questions raised by some co-op conversions. This article does not examine

all of these questions, but it will focus

on why several co-ops have recently

converted to LLCs or other corporate

structures, and how some co-op leaders view co-op conversions. 

Why some co-ops convert 

Attorney Mark Hanson is viewed by

some as an “evangelist” in the cause of

co-op conversions, having been the

architect of several. “We’re supportive

of co-ops,” says Hanson, an attorney

with Lindquist and Vennum, a

Minneapolis-based firm with 13 attorneys devoted to co-op law. “We still

help form more new co-ops than we

convert. But some successful co-ops C

have outgrown the form.”

A load of soybeans arrives at the South Dakota Soybean Processors (SDSP) plant in

Volga, S.D. Photo courtesy SDSP

Reasons vary for co-op conversions; critics 

remain wary of producers losing control 

Leaving home?

Reasons vary for co-op conversions; critics 

remain wary of producers losing control 
Rural Cooperatives / January/February 2005 9

Hanson says co-ops convert for

three major reasons: “To gain capital,

to gain liquidity or to access enterprise

value — the value of the business as a

going entity. In successful co-ops, the

value of the farmers’ commodities is

small compared to the co-op’s enterprise value.” 

Hanson estimates that only a dozen

co-ops have converted to LLCs or

other business forms in recent years.

This doesn’t include conversions of coops which have all their members

residing in only one state. These are

harder to track because they aren’t regulated by the federal Securities and

Exchange Commission. However, the

number of such “one-state” co-op conversions is thought to be very small. 

On the other side of the “conversion aisle” is E.G. Nadeau, director of

research, planning and development

for Cooperative Development Services

in Madison, Wis. Nadeau is a defender

of the traditional co-op model who

sees serious problems ahead if the

small number of co-op conversions and

demutualizations becomes a trend. 

In a report on demutualization (the

term commonly used for conversion of

consumer co-ops — such as housing,

utility, insurance, food and credit coops — to investor-owned business)

which he co-authored for the National

Cooperative Business Association,

Nadeau noted that Australia once had

a large co-op business sector, but experienced “massive privatization” in

recent years.

While such occurrences are still

rare in the United States, “growing

economic pressures to demutualize

requires a coordinated response if

widespread loss of member choice and

control is to be avoided,” he wrote.

Lack of capital is often used to justify

co-op conversions, he adds, saying this

underscores the need to find new ways

to help co-ops gain access to capital. 

The four co-ops discussed below

each started out as new-generation,

value-added co-ops. Adding value to

farm commodities usually requires

building capital-intensive processing

plants, and that means sizable investments by producers. In these four

cases, the minimum investment

required for membership ranged from

$1,500 to $20,000. 

Farmer-members of all four co-ops

voted to adopt new structures that

allow for non-farmer investment. In

each case, more than 80 percent voted

for the conversion. It is important to

note that all but one of the companies

remains 100 percent farmer-owned and

controlled. Dakota Growers raised

outside capital, but farmers still own

more than 90 percent of the shares. 

Golden Oval Eggs LLC; 

Renville, Minn.

One of the top 10 producers of liquid eggs in the nation, Golden Oval

Eggs owns more than 5 million laying

hens and had sales of $80 million in its

last fiscal year. In 1994, when Golden

Oval formed, the co-op required its

700 farmer-owners to deliver a minimum of 2,000 bushels each of feed

corn annually, and to invest $3.50 per

bushel, with each bushel representing a

share.

The desire for greater transferability of co-op stock was the major reason

it converted to an LLC. 

“A lot of our shareholders are

retirement age,” says Marie Staley, vice

president and chief administrative officer for Golden Oval. “They’d like the

company to remain farmer-owned, but

they want to pass shares down to their

children, even if the children aren’t

farmers.”

The new LLC structure brings

shareholders more liquidity, since they

can sell shares to non-farmers. Shares

recently traded for $6.

“Farmers are proud to own the

business, but at the end of the day,

they want to make money,” says Staley.

“Even if that means a different [business] structure.” 

Staley adds that under the LLC

structure, farmer-owners continue to

benefit from the market the company

created for grain, but they are no

longer obligated to deliver grain to the

company. This benefits those who no

longer farm, or who can’t meet their

obligation in times of poor production. 

U.S. Premium Beef, Ltd., 

(an LLC); Kansas City, Mo.

Steve Hunt, CEO of U.S. Premium

Beef (USPB), says liquidity of member

investments ranks as the top reason for

USPB’s conversion. “The LLC structure increases liquidity and flexibility

for our members,” says Hunt. “As their

businesses change, they may want to

slow down, divest or expand.” 

USPB’s 1,900 members include

ranchers and feedlot owners in 36

states. At its initial stock offering in

1996, owners purchased a minimum of

100 shares at $55 per share, with each

share representing the right and obligation to deliver one finished animal to

USPB’s processing company. 

Today, the company owns the

nation’s fourth largest beef processor,

National Beef Packing Co. It had been

partners with Farmland Industries in

the company before buying out

Farmland when the latter filed for

bankruptcy. 

Since converting in late 2004,

USPB has offered two classes of stock,

of which only Class A stock owners are

obligated to deliver cattle. A member

who owned 100 shares before the conversion now owns 100 Class A units

and 100 Class B units, which combined

now trade for $170. 

Dakota Growers Pasta Co. in

Carrington, N.D., is now the nation’s

third largest producer of dry pasta

products. Photo courtesy Dakota

Growers Pasta 
10 January/February 2005 / Rural Cooperatives

Owners of Class A units also benefit

from receiving a dividend based on the

profitability of the company, and additional premiums based on the quality

of beef they deliver. Class A units

receive 33 percent of dividends, while

Class B units earn 66 percent. 

“A rancher nearing retirement

could sell Class A units to a niece who

raises cattle, for example, and hold on

to his Class B units,” Hunt says,

USPB, which had $800 million in

net sales for 2003, continues to see

major benefits in remaining a producer-owned business. “Surveys of USPB

customers show that consumers trust a

product that’s directly tied to the producer,” Hunt says. “They trust how

we treat our animals and the

environment, our animal health

practices, and the quality of our

beef.”

South Dakota Soybean

Processors LLC; Volga, S.D.

Rodney Christianson, CEO

of South Dakota Soybean

Processors (SDSP), cites taxes as

the No. 1 reason his co-op’s

2,100 members voted to become

an LLC in 2002. 

A co-op may pass tax liabilities on

to its members based on business done

with each member — based on patronage. However, the South Dakota company expects to handle more nonpatronage business in the future, and

co-op members would be double-taxed

on that business — both at company

and individual levels. 

In an LLC, Christianson says “All

profits and tax liabilities are passed on

to the member or partner.” He says

the LLC structure better meshes with

SDSP’s goal to maximize member

profits. Christianson estimates 2004

sales at $240 million. 

Based on members delivering 28

million bushels of soybeans per year,

the company produces 620,000 tons of

soybean meal, 50,000 tons of hulls and

310 million pounds of oil. “What if

SDSP develops a market for 40 million

more pounds of oil?” Christianson

asks. “It would be difficult to develop a

patronage relationship with our members for the added soybeans we would

need.” 

Christianson says members have

seen their original minimum investment of $5,000 increase two to three

times. “Our goals remain steadfast:

adding value and returning that value

to our members. The direction is in

the hands of our members and the

board of directors. The organization

builds and keeps loyalty only if it adds

value to its membership.” SDSP’s governance has retained many co-op features, such as one-member, one-vote.

USPB owners also responded to tax

concerns. “As a co-op, anything

deemed non-patronage income was

double-taxed,” says Hunt. “As an LLC,

we can pass through all taxes to the

producer.” Non-patronage revenues in

USPB’s future might come from applying food safety additives to the carcass

in the processing plant, he adds.

Dakota Growers Pasta Co. Inc., 

(a C-corporation); Carrington, N.D.

Durum growers in North Dakota

and Minnesota formed Dakota

Growers Pasta in 1991, before the

term “new generation co-op” had even

been coined. About 1,000 producers

agreed to purchase a minimum of

1,500 shares in the new co-op for

$3.85 each, and to deliver 1,500

bushels of durum each annually to the

co-op. 

Back then, the Durum Triangle of

north-central North Dakota produced

most of the nation’s durum, a wheat

used to make pasta. But years of heavy

rains in the area following the formation of the co-op caused the spread of

a plant blight known as scab. As a

result, durum production declined in

the co-op’s primary membership area,

so production moved west to other

parts of North Dakota and Montana. 

“Mother Nature wasn’t kind to the

farmers who originally put up the

money,” says Timothy Dodd, CEO of

Dakota Growers. “Our members no

longer had the ability to deliver

high-quality durum.” Members

tried to swap grain with the new

producers. “Still, we ran the

risk of being called on the

carpet [for failing to source

the majority of their crop

from members] with no

source of durum.” 

Despite this challenge, ownership in Dakota

Growers proved profitable.

“We paid back farmers’ original investment long ago

through dividends and stock splits,”

Dodd says. 

Since the conversion in 2002,

investors have owned two types of

stock: common stock, which can be

sold to anyone, and Series D stock, a

preferred stock conveyed exclusively to

co-op members before the conversion.

Series D stockholders own a firstcome, first-served privilege to deliver

durum. They can transfer D stock to

other producers, subject to board

approval. 

Dakota Growers, the third-largest

manufacturer of dry pasta products in

North America, generated net revenues of $145 million in 2003, despite

more consumers trending toward lowcarbohydrate diets. Through a partnership with another firm, Dakota

Growers has responded with a new

product offering that reduces the number of digestible carbs found in tradi-
Rural Cooperatives / January/February 2005 11

tional pasta. This pasta will be marketed under the Dreamfields brand. 

Meanwhile, Dakota Growers refuses

to give up on a production revival in

the Durum Triangle. “We created an

agronomy department, and worked

with breeders to develop a variety

that’s resistant to blight,” Dodd says.

While the other three co-ops converted to LLCs, Dakota Growers

became a C-corporation. “The company took this route because it could

reorganize on a tax-free basis, compared to the LLC option,” says Ed

Irion, the pasta company’s vice president for finance. “It also provides

greater opportunities for liquidity and

access to capital.” 

Lindquist and Vennum’s Hanson

— who represented three of the four

co-ops (all but SDSP) — weighs in on

the tax issue: “LLCs are tax-efficient

for distributing income over time,

while C-corporations increase public

investment and liquidity,” he says. Ccorporation status is preferable if

leaders foresee the business becoming

a publicly traded company. A co-op

should become an LLC if generating

income takes precedence over growth,

and if it wants to broaden access to

capital. 

New investors bring added capital 

Of the four co-ops discussed above,

only Dakota Growers has sought outside capital since its conversion. In

2004, MVC Capital provided $5 million in equity financing to the pasta

company. 

“We expect to use the funds to capitalize on what we feel are excellent

opportunities to promote a healthy

lifestyle using the new Dreamfields

[low-carb] technology and to bolster

our position in the traditional pasta

market,” Dodd says. 

“We missed out on some very

appealing opportunities, especially

when Borden Foods exited the pasta

business,” said Dakota Growers

Chairman Jack Dalrymple in 2002

when the co-op converted. “We’re

According to a study commissioned by the National

Cooperative Business Association, co-op conversions

are rarely driven by members or by perceived benefits

to members. Rather, conversion is more often driven

“by co-op staff, leadership or outside consultants”

who stand to gain from a switch, according to the

report, Strengthening Cooperative Business Structures: Lessons Learned from Demutualization and

Cooperative Conversions.

Cooperatives that have high voting thresholds, that

engage their members in their activities, and that stay

connected to the community are less likely to fall prey

to even the most aggressive conversion tactics, the

study says. The report, issued last year, was commissioned by a coalition of organizations including the Consumer Federation of America, Credit Union National

Association, CUNA Mutual Group, National Cooperative

Bank, National Cooperative Business Association, and

the National Rural Electric Cooperative Association. 

It was co-authored by E.G. Nadeau, a director with

Cooperative Development Services in Madison, Wis.,

and Rod Nilsestuen, long-time president of the Wisconsin Federation of Cooperatives and now Wisconsin

Secretary of Agriculture, Trade and Consumer Protection. 

“The best way to avoid demutualization is to have

active members engaged in the cooperative who recognize the role of the co-op in their economic wellbeing,” says NCBA President Paul Hazen.

Even though conversions are relatively rare, the

report said they merit attention because of their impact

on their consumer-members. “The economic disadvantages of co-op conversion for consumer-members are

obvious,” it says. “When the business is motivated by

profit, rather than by member service, most members

will pay more for the services or products they buy.” To

slow the conversion trend, the study recommends a

cross-sector campaign to communicate the benefits of

member-owned businesses and state and federal legislative or regulatory changes to prevent co-op leaderships from gaining financially from conversions. 

The study says rural electric cooperatives and retail

food co-ops have a near total immunity to conversion,

while mutual insurance companies, particularly those

that offer life insurance, have the highest susceptibility

to conversion. Credit unions and housing cooperatives,

constrained by outdated laws and regulations from

dealing with increasing economic pressures, are

becoming conversion targets more often, the study

added. 

Among the study’s sector-specific findings was that

lack of liquidity, financial difficulties and financial

incentives to management and directors have fed the

pressure on farmer-owned co-ops to convert. Members

of a converting farm co-op may enjoy short-term financial gains, but they face longer term losses as they lose

control over the price they are paid for their products.

As a result, the market imbalance that led to creation of

the cooperative in the first place may reemerge.

Strengthening Cooperative Business Structures:

Lessons Learned from Demutualization and Cooperative Conversions is available from NCBA, 1401 New

York Ave., NW, Suite 1100, Washington, DC 20005. Contact Art Jaeger, (202) 383-5462 for more information. ■

Study: co-op conversions rarely member-driven

continued on page 36
12 January/February 2005 / Rural Cooperatives

By Steven J. Holland 

Macalester College

Robert P. King,

University of Minnesota

Editor’s note: Holland is policy associate,

Macalester College. King is professor and

head of the Department of Applied

Economics, University of Minnesota.

Please e-mail questions to:

Rking@apec.umn.edu

he new-generation cooperative (NGC) is an

institutional innovation

that has helped many

farmers establish valueadded processing operations that

would have been impossible to capitalize with a traditional cooperative.

NGCs — with well-defined delivery

rights/obligations and tradable shares

— were a driving force in the sharp

increase in the number of cooperatives

formed during the 1990s. More

recently, though, concerns have begun

to emerge about the long-run viability

of NGCs. 

In 2002, for example, members of

Minnesota Corn Processors approved

the sale of their cooperative ethanol

and corn sweetener business to ArcherDaniels-Midland, and members of

Dakota Growers Pasta Co. approved

conversion of their cooperative to an

investor-owned corporation (see page

8). Should these and other takeovers

and conversions be considered aberrations, or do they reveal an inherent

vulnerability of the NGC organizational form? 

Each takeover or conversion case is

unique, with a sequence of events and

decisions that led to organizational

change. In order to explore the question of whether there are fundamental

forces common to all situations, we

developed a simulation model of cooperative formation and the market for

cooperative stock. 

Our model is “populated” by farmers who produce a crop that can be the

raw product for a value-added processing facility. These farmers differ in the

amount of land they farm, location and

risk attitudes, but all manage their

resources and make investment decisions in a way that maximizes their

long-run welfare. 

The model also includes a noncooperative firm that is not involved in

farming but can build a processing

plant or purchase a cooperatively

owned plant. The farmers in the

model can join together to create a

cooperatively owned value-added processing plant, and the procedures for

trading cooperative stock can be modified in the model in order to explore

the implications of these organizational

design decisions.

• We use our model to investigate

three questions:

• Why do cooperatives often lead in

the development of new types of

value-added processing?

• When is an NGC most likely to be

vulnerable to takeover by a noncooperative firm? 

• How do rules and procedures for

trading NGC stock affect cooperative formation and vulnerability to

takeover? 

Our findings help explain NGC

takeovers and conversions. They also

point to some practical steps cooperative boards can take to make an NGC

more attractive to new farmer

investors and more robust when faced

with takeover threats.

Why do co-ops often lead in the

development of new types of 

value-added processing?

A significant, but rarely mentioned,

advantage of farmer investment in an

NGC value-added processing facility is

the benefit of diversification. Consider

the case of corn producers who have

Co-op stock exchange

Why choice of trading rules matters for new-generation co-op stockholders

The diversification of stock benefits is one

reason so many ethanol cooperatives are

being organized on the new-generation

co-op model. 

T
Rural Cooperatives / January/February 2005 13

an opportunity to invest in an ethanol

plant. These farmers always face the

risk of large downward swings in the

price of corn. 

However, low corn prices increase

the operating margin for an ethanol

NGC, yielding higher patronage

refunds. While investment in an

ethanol plant carries its own risks, it

can also result in a moderation of a

member’s overall exposure to uncertainty by blunting the impact of downward corn price fluctuations. In short,

the NGC provides benefits to members beyond the ability to share in the

enterprise’s profits.

The opportunity to diversify helps

members, but it also helps the cooperative. If cooperative investors benefit

from the diversification offered by

shares of an NGC, then they should be

— and they apparently are — willing

to invest in an NGC processing plant

that is slightly less profitable than

would otherwise be necessary to attract

investment. The practical implication

is that it is easier for the cooperative to

sell shares when the benefits of diversification are known to potential

investors.

The diversification benefits of

NGC stock ownership may help

explain why so many ethanol plants

are NGCs. For example, according to

the Minnesota Department of

Agriculture, 11 of Minnesota’s 14

ethanol plants are NGCs — accounting for over 85 percent of total

ethanol production in the state. 

As a general rule, investor-owned

firms (IOFs) invest in ethanol production because it promises to be profitable — not because it helps to diversify their portfolios. Consequently,

they will build an ethanol plant only

when it promises a level of profitability

sufficient to fully recoup the cost of

their investment. New-generation

cooperatives, on the other hand, can

tolerate lower profitability because

they offer the added benefit of diversification to their members. It follows

that NGCs can raise the money to

build processing plants under conditions where IOFs would shy away.

Figure 1: Investment thresholds for an

NGC and an IOF

Figure 1 illustrates this point. An

ethanol plant is highly profitable when

the ethanol price is high and the corn

price is low. This corresponds to the

area in the upper left corner of the

figure, which represents conditions

under which investment is desirable

for anyone. In the lower right corner,

the ethanol price is low, the corn price

is high, and the ethanol plant is likely

to be losing money. Here, no one

wants to own an interest in the plant.

The “investment thresholds” in figure

1 represent the conditions under

which an NGC and an IOF will first

find investment in an ethanol plant

desirable.

Because of the benefits of diversification, potential NGC members are

willing to invest in value-added processing facilities under less favorable

circumstances than IOF investors. As a

result, there should be market conditions (those between the two investment thresholds) where NGC members would be willing to invest in a

processing facility when IOF investors

would not. This can give a start-up

NGC the opportunity to form without

interference from a competing IOF.

When is an NGC most likely to be

vulnerable to takeover by a noncooperative firm?

One of the reasons NGCs offer

diversification benefits is because

members can constantly adjust their

exposure to risk by trading their NGC

shares. Of course, this argument fails

when the member’s shares cannot be

easily traded. This is called the “thin

market” problem. 

In most cases, only a limited number of individuals are in a position to

buy NGC stock because cooperative

laws require that members produce the

product being processed. Among those

who can buy stock, even fewer actually

will want to. 

For example, many corn producers

considering investment in an ethanol

plant will be too far from the ethanol

plant to make membership in the

NGC a viable investment. Some simply will not be interested in investing.

The thin market problem is made

worse by the fact that members tend to

have the same general objectives. For

example, when an ethanol plant is

doing very well, there will be many

potential investors but there might be

a shortage of sellers. On the other

hand, when an ethanol plant is not

profitable, many members may be willing to sell but few will be willing buyers. 

In either case, little NGC stock will

be traded unless there are large

increases or decreases in share prices,

and investors will begin to fear that

they will not be able to get out of the

investment. In other words, a thin

market can make the decision to invest

irreversible.

This irreversibility can have two

important effects on an NGC. First,

potential investors may hesitate to buy

shares if they anticipate the investment

may be irreversible. This sort of thinking makes it much more difficult for

the NGC to raise initial capital. 

The second problem occurs when

the NGC is able to form, but the market for NGC shares becomes thin later

on. Our model suggests that this is a

distinct possibility. 

Generally, when an NGC makes its

initial offering, there are interested

investors who are not able to buy

stock. Over the first few years after the

NGC forms, both the volume of stock

trading and the share price are

propped up because producers who did
14 January/February 2005 / Rural Cooperatives

not invest initially are trying to buy

into the NGC. Once most available

investors have achieved a level of

investment that fits their needs,

though, fewer people want to buy and

sell NGC stock and the thin market

problem sets in.

Our analysis suggests the trading

volume and share price of an NGC

will remain relatively high as investors

adjust their holdings of NGC stock.

However, trading volume and share

price will settle to much lower levels

after this initial period of adjustment,

and this may present an opportunity

for an IOF looking to invest. 

If the NGC share price drops far

enough, the cost to an IOF of purchasing an existing processing plant will be

lower than the cost of building a new

one. This might be sufficient to pull

the IOF into the market. At the same

time, NGC members who have been

frustrated about their inability to sell

shares to other producers might see an

offer from an IOF as too good to pass

up. This response to the thin market

problem may help explain why NGCs

are sometimes taken over by IOFs or

choose to convert to legal forms that

allow investment by non-producers.

How do rules and procedures for

trading NGC stock affect co-op

formation and vulnerability to

takeover?

The thin market problem reduces

the demand for NGC shares, makes it

more difficult for NGCs to raise capital, and increases the chances of

takeover by an IOF. If NGCs are to

fully realize their advantage over IOFs,

they must find a way to alleviate the

thin market problem. Here are three

strategies that can help.

1) Choose trading procedures carefully.

NGCs use a variety of procedures

to trade their stock. In some cases the

cooperative acts as a clearinghouse that

puts willing buyers in touch with willing sellers. Many other NGCs organize periodic stock auctions. When

establishing rules for trading stock, few

boards consider the effect on the cooperative’s ability to raise money or survive a takeover attempt.

Economists often refer to a “perfect” market, with many buyers and

many sellers shouting out the prices at

which they are willing to buy or sell

the good. If the quantity offered for

sale at the prevailing price is less than

the quantity demanded, buyers will bid

up the price in an effort to buy the

limited supply before their competition

does so. 

The same process brings the price

down when supply exceeds demand.

The immediate and accurate exchange

of information makes this process happen quickly and results in an equilibrium “market price” at which supply

equals demand. This is called a perfectly competitive market.

For a perfectly competitive market

to exist in the real world there must be

many buyers and sellers and free

exchange of information. However, the

pool of potential buyers and sellers for

NGC stock is often small. Also,

despite an NGC’s best efforts, there

may not be a free flow of information

when information about members

wishing to buy or sell shares is simply

listed on a bulletin board or a Web

site. This does not provide a mechanism for potential buyers and sellers to

quickly adjust price or quantity to

reflect market conditions. 

Some NGCs have tried to overcome their inability to create a perfect,

liquid market for their stock by holding frequent stock auctions. But the

design of the auction format can have a

significant effect on market liquidity.

We used our model to evaluate two

types of auctions.

The first is called a “discriminatory”

auction. Potential sellers submit a

reserve price and potential buyers submit a bid price. The cooperative then

matches buyers who submit high bid

prices with sellers who submit low

reserve prices until no more matches

are possible. Inevitably, some people

submit bids or “asks” that are unsuccessful. The defining characteristic of a

discriminatory auction is that successful buyers pay their bid price.

While a discriminatory auction is a

convenient and easy way to match buyers and sellers, it may not be the best

way to increase market liquidity. Buyers, knowing they will pay their bid

price, have an incentive to submit a bid

that is lower than the amount they are

truly willing to pay. However, lower

bid prices can mean that trades that

could have taken place if bids had been

“honest” will not take place. This

increases market thinness.

An alternative to the discriminatory auction is a “competitive auction.”

Under a competitive auction mechanism, successful bidders do not pay

their bid price. Instead, everyone

trades at the same market clearing

price — that is, the price at which the

number of shares with bids at or

above the market clearing price is

equal to the number of shares with

reserves at or below the market clearing price. 

With this rule, successful bidders

are guaranteed to pay an amount that

is lower than or equal to their bid, so

they have no incentive to bid below

their true valuation of the stock.

Higher bids imply more trading, and

this increases market liquidity. Results

from our modeling analysis indicate

that the shift from a discriminatory to

a competitive auction can significantly

increase market liquidity and reduce

the likelihood of takeover by an IOF.

2) Diversify the NGC membership.

Recall that a thin market can arise

when investors all have the same general objectives. Another way, then, to

improve liquidity in the NGC stock

market is to increase diversity among

members. 

For instance, when the NGC is

profitable, a young farmer may want to

increase the level of his or her investment. Normally, he or she would have

trouble finding a seller, but if the

NGC has a number of members nearing retirement, some of them might

take that opportunity to sell their

shares. In this way, diverse ages can

improve market liquidity.

continued on page 33
Rural Cooperatives / January/February 2005 15

Copyright 2004, Des Moines Register 

ike the blue cheese it

produces, the Golden

Ridge Cheese Cooperative had to age a while

before it was ready to go.

Founded five years ago by 40 Old

Order Amish dairy farmers in northern

Iowa and southern Minnesota, Golden

Ridge was plagued by a series of production problems before the first blue

cheese wheels were shipped from its

12,500-square-foot plant north of

Cresco, Iowa, last January.

The Amish farmers invested more

of their own capital into the plant, for

a total of $1 million, and brought in

Neville McNaughton, a New Zealand

native and cheese consultant who

now lives in St. Louis. Like the blue

mold that turns the Amish milk into

cheese, McNaughton’s addition as

general manager has turned the

Golden Ridge co-op into a going

operation.

The co-op got a big boost in July

when its Schwarz und Weiss natural

rind blue cheese tied for first place in

the blue cheese category of the

American Cheese Society’s annual

contest held in Milwaukee.

The competition is “considered

one of the world’s most influential

and prestigious competitions in recognizing the art of specialty cheesemaking,” according to the American

Cheese Society’s Web site. Since 

the announcement of the award,

McNaughton said, “Cheese is now

flying out of here. People are calling

us.” Prospects at the co-op weren’t so

rosy when McNaughton first showed

up at the Golden Ridge plant.

“This was a stalled project,” he said.

V ALUE-ADDED CORNER

Iowa cheese co-op helps

preserve a way of life

Cream of the crop: Neville McNaughton and Sara Bahgat pull stainless steel knives through a 7,000-pound batch of natural blue cheese at

Golden Ridge Cooperative. Photo by Harry Baumert. Copyright 2004, Des Moines Register and Tribune Co. Reprinted with permission.

L
16 January/February 2005 / Rural Cooperatives

“They couldn’t decide how to get this

up and running.”

McNaughton did a three-day assessment of the operation and re-wrote the

co-op’s business plan. The co-op had

been focused on making what

McNaughton called commodity blue

cheese. “We refocused the plant on

making a quality product that plays to

the strength of the milk,” he said.

A $2 million loan guarantee was

obtained from the U.S. Department of

Agriculture’s rural development agency

[USDA Rural Development]. That

loan guarantee allowed the co-op’s

bank to advance it more money to

reconfigure the plant.

Dan Gingerich, an Old Order

Amish dairy producer from

Lanesboro, Minn., said the co-op

members “didn’t realize what we were

getting into” when they decided to

form the co-op and make cheese. The

dairy producers milk their small herds

by hand and sell the milk in stainless

steel cans weighing 80 pounds that

hold just under 10 gallons of milk.

The number of dairy processors willing to handle their milk cans had

dropped from five to one, Gingerich

said, narrowing their marketing

options considerably.

“I’m trying to hang on to the dairy,”

he said. “It got tougher to make a living on the farm than 20 years ago.”

Forming a cooperative to produce

cheese in a modern plant needed to be

examined by leaders of the Old Order

Amish, Gingerich said. For religious

reasons, Old Order Amish do not use

many kinds of modern machinery.

Their lifestyle is best known for the

horse-and-buggy transportation on

which the Amish rely.” Our elders

thought that in order to keep the family farms going, we needed to change,”

Gingerich said.

“We needed something like this so

our children won’t have to live on one

or two acres and become factory workers. On the one hand, it might be a

modern concept, but on the other

hand, we needed to have something

like the cheese plant to keep our way

of life going.”

With McNaughton on board and

the American Cheese Society award,

Gingerich said he thinks Golden Ridge

has turned the corner. Golden Ridge

makes three cheese products: Schwarz

und Weiss, which means “black and

white” in German; Harmony Blue,

which has extra cream added, and

Ultimate 50, which is half Amish cow

milk and half goat milk supplied by Joy

Peckham, whose Peckview Dairy

Goats operation is near the plant.

Peckham sells the Golden Ridge

cheese and her other dairy goat products at the Metro Market in Des

Moines and the Des Moines Farmers

Market.

“Last weekend, I sold everything I

brought in from Golden Ridge in the

first hour,” Peckham said. “I wish I had

brought more.” Peckham said she

hopes the Ultimate 50 cheese takes off

so she can eventually sell to Golden

Ridge all of the 500,000 pounds of

goat milk produced annually by her

goats. Now, she sells almost all of her

goat milk to a plant in Illinois.

Steve Logsdon, owner of the Basil

Prosperi Bakery in Des Moines, said

Schwarz und Weiss is selling well out

of his dairy case.

“We carry European blue cheeses

and Australian blue cheeses, and we’ve

had a really good response to the

Golden Ridge cheese,” Logsdon said.

“People like the fact that it’s from Iowa

and that they are using their own

milk.” The Golden Ridge cheese also

is priced competitively, he said, with a

half-pound selling for $7 to $8, about

the same as the nationally known

Maytag blue cheese, the only other

blue cheese made in Iowa.

Swiss Valley Farms, a farmer-owned

cooperative with operations in Iowa,

makes blue cheese at its plant in

Mindoro, Wis. Myrna Ver Ploeg, president of Maytag Dairy Farms, said she

did not think the Golden Ridge and

Maytag blue cheeses can be compared.

“Ours is so different because it is made

by hand,” Ver Ploeg said. “They are

very different cheeses, and they satisfy

different markets.”

The Maytag Dairy Farm, which was

founded by Maytag appliance family

members in 1941, no longer is connected with the company. The dairy is

privately owned by 12 Maytag family

members. The dairy does not release

its sales numbers, Ver Ploeg said, but it

makes 1 million pounds of blue cheese

a year and buys 27,000 gallons of milk

a day from small dairy farms within 15

miles of Newton. The Maytag dairy is

expanding its aging calves to allow

production to increase, Ver Ploeg said.

“We don’t make enough cheese to

meet the demand,” she said. “We don’t

want to be a big cheese company. We

just want to be a good one.”

Gingerich, chairman of Golden

Ridge, said the same thing about the

Amish co-op.“We want to keep it

small,” he said.

McNaughton said Golden Ridge

now buys about 20,000 pounds of milk

a day from its Amish producers. But

only about 5,000 pounds of the milk

bought by Golden Ridge is processed

into cheese, McNaughton said. The

rest is sold to AMPI, a large regional

dairy processor [and also a farmerowned cooperative]. The co-op’s goal,

Gingerich said, is to make all the

Amish milk into cheese. 

Editor’s note: this article is reprinted

courtesy the Des Moines Register. In addition to the $2 million USDA Business and

Industry (B&I) Guaranteed loan mentioned above, Golden Ridge Cheese

Cooperative also received a $500,000

Value Added Producer Grant (VAPG)

from USDA Rural Development. To learn

more about both programs, visit: www.rurdev.usda.gov, and follow the links for business programs. Or call (202) 720-4323,

and press “1” to be connected to your

USDA Rural Development state office. ■

“Cheese is now flying

out of here. People

are calling us.” 
Rural Cooperatives / January/February 2005 17

By Kimberly Zeuli,

Assistant Professor

University of Wisconsin-Madison

Editor’s note: More highlights of the

2004 Farmer Cooperative Conference will

be included in the March-April issue of

Rural Cooperatives. 

“Innovation is rarely rocket

science...in the past few decades,

most of the companies that have

created truly extraordinary

amounts of wealth have done so

by inventing great processes, not

great products.” 

(The Economist, April 24, 2004)

usiness innovation can be

defined as any new activity related to firm structure, production and

output. Today, many

cooperatives are at the forefront of

agribusiness innovation. Cooperatives

are being created in new sectors, such

as renewable energy, to help farmers

capture the full rewards of technological innovation. Established cooperatives are modifying their financial and

ownership structures to seek strategic

advantage in today’s global marketplace while continuing to meet the

needs of their diverse memberships.

Recent changes in state laws allow

unprecedented prospects for the evolution of the cooperative model. 

The seventh annual Farmer Cooperatives Conference — Cooperative

Innovation — highlighted some unique

and successful examples of innovative

agricultural cooperatives. The annual

conference, most recently held Nov. 1-

2 in Kansas City, was established by

the University of Wisconsin Center for

Cooperatives (UWCC) in 1998, with

financial support from the Farm

Foundation, to provide an open forum

for critical thinking about the major

trends and issues affecting agricultural

cooperatives. 

New energy for co-ops

It seems that everyone is talking

about ethanol these days, spurring

great expectations for corn and grain

producers. According to the

July/August 2004 issue of USDA’s

Rural Cooperatives magazine, 75 ethanol

plants operate in the Midwest and

Great Plains, with another dozen or

more under construction. Most of

these ethanol plants are farmer owned.

Raymond Defenbaugh, president and

CEO of Big River Resources Ethanol

pant, and John Eggleston, board president of Northeast Missouri Grain

Processors LLC, provided insight into

how farmers can successfully secure

the returns ethanol promises. 

They both agreed that farmers need

to commit to success and be willing to

sacrifice much for achievement. As legendary football coach Vince Lombardi

once said, “winning is everything.”

Success also requires patience. Ten

years of planning went into the

Northeast Missouri ethanol plant. 

Defenbaugh suggested that farmers

and co-ops might not be attacking the

right enemy: “The enemy in agriculture

is not other farmers and not other companies. It is poor prices. Farmers need

to work together to combat this enemy.”

The statement that agricultural coops needed to work together to succeed

was reiterated throughout the conference. As Benjamin Franklin said, “We

must all hang together...or assuredly

we shall all hang separately!”

Practicing what they preach, Big

River Resources Ethanol members are

willing to share the lessons they learned

with other farmers interested in starting an ethanol plant. As Defenbaugh

noted, his co-op has also certainly benOf necessity & invention

Conference shows diversity of responses

by co-ops to changing market conditions

B
18 January/February 2005 / Rural Cooperatives

efited from the experiences of others

along the way. He also stressed the

importance of partnerships. Big River

has pursued several joint-venture

opportunities, with very positive

results. “Most people want to work

together, so don’t hesitate to look into

joint-venture options.”

Defenbaugh and Eggleston also

issued a perennial warning to all new

co-ops: make sure you raise sufficient

capital — the “life blood” of any organization. If co-ops are not adequately

capitalized, they are not managing risk

well. However, those interested in

starting an ethanol co-op can’t assume

capital will flow to the co-op, even

with a good business idea.

With all the interest in ethanol, is

there a risk of producing excess supply?

Defenbaugh believes that this is a possibility, but legislation and the increasing popularity of ethanol fuel will balance supply and demand. He compared

ethanol to the computer, which was

ahead of its time at first, but today is

used by most of the population. 

Necessity: the mother of 

cooperative innovation 

“If necessity is the mother of invention,

then resourcefulness is the father.” 

— Beulah L. Henry (The inventor of 

a type of umbrella.)

CHS Inc. provides compelling evidence that cooperatives can innovate

when it comes to changing traditional

structure. John McEnroe, vice president of Country Operations for CHS,

provided one specific example of this

with his presentation on the CHS

“regionalization” concept. 

Regionalization refers to the situation when a local co-op is essentially

consolidated with CHS (the local

becomes a CHS business division), but

it may maintain its own name and

retains its local producer board and

considerable local control.

The CHS regionalization concept,

under which it has consolidated with

27 local co-ops, was born in 1993 in

North Dakota. At that time, a local coop there in CHS’ trade territory was

struggling, but the board didn’t want

to sell the co-op or invest in new assets

because of the risk posed to its patron

equity. Eventually, it agreed to merge

with CHS to gain CHS’ oversight on

strategic management decisions at the

local co-op level.

In addition to its fully autonomous

member co-ops, CHS currently

includes 27 “regionalized” local co-ops

(business units). All 27 pool their

patronage with CHS. The patronage

refunds are then distributed back to the

locals, based on local use. CHS works

closely with these units in terms of

major decision-making and marketing. 

For example, the CHS board

decides the percentage of cash

patronage refunds and the level

of equity redemption. The local

co-op’s employees become CHS

employees, although the local

co-op retains daily authority.

One of five regional directors

for CHS attends the local board

meetings. 

McEnroe acknowledged that

there are pros and cons to this

concept. On the positive side, it

brings financial stability to the

local co-ops, which are afforded

timely equity redemption and

protection. The local co-op still

maintains significant control and

direction at the local level, while

also achieving economies of

scale as part of CHS. On the

downside, members may perceive that the co-op is “selling

out,” although in actuality members retain considerable local

control, as well as the ongoing

economic benefits of being part of a

co-op. 

Authority for a few decision-making

abilities — such as how equity is paid

out, which is decided by the CHS

Board — is also lost and, ultimately,

the local co-op’s fortunes are tied to

those of CHS. 

In contrast, as CHS would be the

first to acknowledge, many local coops are doing just fine on their own,

implementing their own innovative

strategies. 

Jeff Nielsen, general manager of

United Farmers Cooperative (UFC),

presented such a case. UFC is a highly

diversified local cooperative. Risk management and the desire to provide

“customer-driven solutions” guided its

pioneering effort to create a memberowned alternative insurance company:

Parthenon Risk Partners. According to

Nielsen, “the cost of insuring our people, property and assets had become

almost unbearable.”

Parthenon is a captive insurance

company; this means it is owned and

controlled by the insured parties. It is

similar in design and operations to a

cooperative business. In 2002, there

were over 4,500 captive insurance

companies operating in the United

States. This new insurance program

has helped UFC lower insurance premiums and increase coverage for its

employees. 

Nielsen believes that: (1) a proactive and engaged membership and

(2) a pro-active and visionary board are

the two essential components for

All 27 of CHS’ ”regionalized” local co-ops retain daily

operational authority, but the CHS board decides the

percentage of cash patronage refunds and the level

of equity redemption. Above, grain loading at the

Corson Co-op in southeastern South Dakota. Photo

courtesy CHS.
Rural Cooperatives / January/February 2005 19

cooperative innovation. “When making a commitment to find a solution,

you need to decide whether to create a

quick fix or the correct fix.”

Market stress leads to

cooperative formation 

In 1972, the Michigan factory that

local cherry farmers sold their crops to

was closed. One of those farmers was

Don Nugent, who — along with other

cherry growers — responded to the

closure by forming Graceland Fruit

Cooperative, which purchased the factory. 

The dual problems of oversupply

and the short, 12-hour shelf life of ripe

cherries provided the momentum to

create an innovative food product:

infused dried cherries. Nugent, now

president and CFO of Graceland Fruit,

overcame food poisoning and a car

accident to close a marketing deal for

this product with Ocean Spray, vividly

illustrating the principle that persistence pays off. 

In 1998, the IRS ruled that

Graceland no longer qualified as a coop because of its level of non-member

business, so it converted to a C-corporation. The cherry growers created a

new co-op (still using the old name,

Graceland Fruit Cooperative), which

supplies all of the cherries to Graceland.

Nugent believes that growing an innovative co-op depends upon a good strategic plan, a solid management team that

can implement marketing strategies, as

well as alliances for inputs, manufacturing and sales. 

As the instigator of a new Wyoming

cooperative state law, the Mountain

States Lamb Cooperative (MSLC) is

often featured in co-op news. MSLC is

a Wyoming-based, vertically integrated

marketing cooperative for lamb and

wool. It has 125 members in 10 western states. 

By the turn of the last century, lamb

producers had suffered through 20

years of dismal prices. A core group of

producers decided to form a vertically

integrated marketing and processing

operation, but were confronted a

major road block: lack of capital. Nonproducers who considered agriculture

vital to their rural communities wanted

to invest in such a venture, but they

could not if it was organized as a cooperative. Some members also wanted to

invest more but did not want to have

to supply a proportionate amount of

product. 

Brad Boner, board chairman of

MSLC, said the cooperative created a

separate co-op in 2001, the Mountain

States Lamb & Wool Cooperative

(MSL&W), which is organized under

the new Wyoming co-op statute. MSLC

is the sole member of MSL&W. The

latter was formed to provide marketing,

processing and other services to both

patron and possibly non-patron members.

This co-op’s structure (referred to

as “the Wyoming model” or the

“Patron Investor Cooperative”) is similar to an LLC in that it allows outside

investment without a delivery requirement, but the business also receives the

benefit of co-op tax laws while being

able to provide a return greater than

the standard co-op limit of 8 percent

on contributed capital. MSL&W now

sells its products on both coasts and

has a joint venture with a New York

lamb wholesaler. A cross-country supply ensures year-round, consistentquality products. 

According to Mark Hanson,

Attorney & Partner at Lindquist &

Vennum PLLP and the primary architect of the new Wyoming cooperative

statute, “The changing demographics

of producers in the United States and

elsewhere and the consolidations in the

food industry generally will provide

opportunities, nudge and even force

changes in business structure.” From

his perspective, the traditional co-op

model was designed to enhance farmermember income, not provide increased

returns to investment. Therefore, a

modified structure is necessary for

today’s value-added cooperatives. 

Co-op conversion — is it worth it?

Gene Carbone, former CFO for

Calavo Growers, spoke previously at

the Farmer Cooperatives Conference

in 2000, when his California-based avocado-growers’ co-op was in the midst

of converting to a C-Corporation.

With hindsight, has his perspective on

the conversion changed?

Carbone said he believes it was a

success, in the sense that it provided

much needed liquidity to members and

provided a market-driven firm valuation. After conversion, shares were initially offered at $5. Shares are currently trading at $10.80 and there is a

healthy turnover rate. 

“Today, Calavo members are driving

Lexuses and Mercedes,” he said. “The

shareholders are very happy.” Original

members have probably been selling

some of their stock to new investors,

but former members are also returning

to the company. This suggests that the

capitalization issue was an important

impediment to Calavo members. 

Under the current corporate structure, the company no longer has to

treat all growers equally. Carbone feels

this flexibility is another positive outcome from the conversion. However,

Calavo has to offer competitive returns

for the fruit producers (dividends per

continued on page 35

“The enemy in 

agriculture is not

other farmers and

not other companies. 

It is poor prices.

Farmers need to

work together to

combat this enemy.”

—Raymond

Defenbaugh
20 January/February 2005 / Rural Cooperatives

By Donald A. Frederick,

Program Leader for Law, 

Policy & Governance

USDA Rural Development/RBS

e-mail: donald.frederick@usda.gov

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

Revenue Service, the U.S. Department of

the Treasury or any other government

agency. It is presented only to provide

information to persons interested in the tax

treatment of cooperatives. 

n Oct. 22, President

Bush signed into law the

American Jobs Creation

Act of 2004. The primary impetus for the new

law was a World Trade Organization

(WTO) ruling that certain export tax

benefits in our existing tax code violated international trade agreements we

had signed. The WTO authorized

European countries to collect special

tariffs on American products they

imported, until we repealed those

export tax benefits. 

While the original purpose of the

legislation was to repeal the export

incentives in question, numerous other

changes to the tax code were added

during the legislative process. The end

result is a long, complex statute that

includes several provisions important

to cooperatives.

Extraterritorial Income 

Exclusion repeal

The offending export incentive,

called the extraterritorial income (ETI)

exclusion, is repealed for transactions

after Dec. 31, 2004. This includes the

language allowing agricultural and

horticultural marketing cooperatives to

pass ETI benefits through to their

patrons. Transition rules provide cooperatives and other taxpayers with 80

percent of their otherwise-available

ETI benefits for transactions during

2005 and 60 percent of their otherwise-available ETI benefits for transactions during 2006. 

Transition relief is also available for

income realized under certain contracts in effect on September 17, 2003.

U.S. Production Deduction enacted

To encourage United States domestic economic growth, the law provides

a new, phased-in deduction from taxable income for a portion of “qualified

production activities income” (QPAI)

generated by businesses, including

cooperatives. The new deduction can

be as much as 3 percent of QPAI for

tax years beginning in 2005-2006, 6

percent for 2007-2009, and 9 percent

for 2010 and later.

The range of income that can qualify is broad, including most taxable

income realized on manufacturing,

producing, growing and extracting

goods in the United States. Special

rules of interest to cooperatives provide that:

• Income from food processing (but

not retail operations) is included,

• Income from storing and handling

(but not transporting) agricultural

products that are used in manufacturing, producing or growing other

goods is included, and

• Income from the production (but not

the transmission or distribution) of

electricity, natural gas and potable

water is included.

Two limitations apply to this deduction. First, the deduction that may be

claimed is the lesser of QPAI or taxable income for the year. So, if a cooperative or other taxpayer loses money

on other activities, that could reduce

or eliminate this deduction. A special

provision in the law says cooperatives

that allocate the deduction to their patrons

can compute “taxable income” for this

purpose without taking into account

their deductions for qualified patronage refund and per-unit retain allocations and the redemption of non-qualifieds. The allocation rules are discussed later in this article.

Second, the QPAI deduction may

not exceed 50 percent of the W-2

wages paid by the taxpayer for the year.

Cooperative Pass-through Provision 

The report of the conferees who

drafted the final version of the law

makes it clear that income derived

from manufacturing, production,

growth or extraction of any agricultural or horticultural product by a cooperative, or from marketing agricultural

or horticultural products by a cooperative, may be included in the cooperative’s QPAI. A note to that report

states that the term “agricultural or

horticultural product” includes “fertilizer, diesel fuel and other supplies used

in agricultural or horticultural production that are manufactured, produced,

LEGAL CORNER

New tax law includes several

cooperative provisions

O
Rural Cooperatives / January/February 2005 21

grown or extracted by the cooperative.”

The law provides that patrons of

agricultural and horticultural cooperatives

can take a deduction on their tax

returns for QPAI allocated to them as

part of a qualified patronage refund or

qualified per-unit retain. The amount

each patron can deduct must be computed by the cooperative and a written

notice must be provided each patron

explaining the computation.

A special rule says a cooperative may

not take a patronage refund deduction

for amounts passed through to patrons

that can be deducted by those patrons.

As this amount is already eligible for

the QPAI deduction at the cooperative

level, this language merely makes it

clear cooperatives can’t deduct the

same amount twice.

Example case

This example illustrates how the

deduction and the pass-through might

work at a typical agricultural or horticultural cooperative. Assume Co-op C

has $100,000 of QPAI. Also assume it

is a tax year beginning in 2005 or

2006, so the available deduction is 3

percent of QPAI, or $3,000.

Co-op C allocates the $100,000 to

its member-patrons as a qualified

patronage refund. It is allowed to

deduct the $3,000 in QPAI under the

new law and the remaining $97,000 as

a traditional patronage refund. Thus,

the result is the same for the cooperative as it was before the new law was

enacted, the entire $100,000 is

deductible.

Now, assume Patron P does 10 percent of the business with Co-op C in

the tax year. Patron P receives a

patronage refund of $10,000 in QPAI,

all of which is taxable income to Patron

P. However, under the new law Patron

P can deduct the applicable percentage

of QPAI (3 percent in 2005 and 2006),

or $300. The value of this benefit will

increase significantly when the QPAI

deduction increases to 6 percent in

2007 and again to 9 percent in 2010.

Another provision states that any

qualifying activity of patrons who market agricultural or horticultural marketing through a cooperative may be

attributed to that cooperative for purposes of computing its QPAI deduction.

Planning suggestions

Here are some points to remember

in planning how best to use this new

deduction. First, the legislative language is not always entirely clear. Tax

experts have many unanswered questions about determining what income

is eligible for the deduction. So, all

cooperatives will want to work with

their tax adviser to keep abreast of

Internal Revenue Service rulings and

other interpretations of this program.

Second, the deduction is first available for tax years beginning on, or

after, Jan. 1, 2005. Many cooperatives

on a tax year that begins sometime in

the summer or fall will thus have nearly two years to become familiar with

the intricacies of computing and allocating it.

Third, it is a deduction, not a credit. Tax credits, such as the energyrelated credits discussed later in this

article, can be used dollar-for-dollar to

offset taxes due. Deductions can only

be used to reduce taxable income, so

their value depends on each taxpayer’s

tax bracket.

Dividend Allocation Rule repeal

The dividend allocation rule was an

Internal Revenue Service (IRS) interpretation of the tax code requiring

cooperatives that paid dividends on

their equity investments to allocate

those dividends on a pro rata basis

between their patronage and nonpatronage income. Under the new law,

cooperatives can pay dividends on

stock entirely out of non-patronage

income. This allows cooperatives to

reduce the tax cost of paying dividends

on their equity investments and, at the

same time, return more of their margins to patrons as patronage refunds.

To take advantage of this change,

the new law requires cooperatives to

have appropriate language authorizing

them to pay stock dividends out of

non-patronage income in their articles

of incorporation, bylaws or marketing

contracts with their members and

other patrons. Many cooperatives will

want to amend one or more of these

organizational documents to include

such a provision.

Declaratory Judgment relief

Farmer cooperatives that want

access to the special tax deductions

permitted under Internal Revenue

Code section 521 and other benefits

that come with section 521 status,

must apply for, and receive, approval

from IRS. In the past, the only ways a

cooperative could get a court to review

a rejection of its application was claim

a deduction IRS said they weren’t entitled to, or pay some tax they didn’t

think they owed and then sue for a

refund. This provision enables a

farmer cooperative to seek judicial

review of the denial without first creating a tax controversy or being subject

to immediate tax liability.

Marketing includes value-added 

processing involving animals

One of the activities that allows a

farmer cooperative to qualify for section 521 tax status is to engage in

“...marketing the products of members

or other producers.” IRS interpreted

this language to include value-added

processing involving a mechanical

process (converting corn to ethanol)

but not a biological process (feeding

corn to hens and selling eggs and

chickens). 

The new law makes it clear that

under both section 521 and regular

cooperative tax rules, marketing products of members and other producers

includes feeding products of members

and other producer to cattle, hogs,

fish, chickens or other animals and

selling the resulting animals or animal

products.

Small ethanol producer

credit, co-op pass-through

Current law provides a 10-centsper-gallon tax credit for each gallon of

ethanol produced and sold by so-called

continued on page 34
22 January/February 2005 / Rural Cooperatives

By Stephen Thompson,

Assistant Editor

or people in the area

around Wauchula, Fla.,

located on the state’s

mid-Gulf Coast, 2004

was not the best of years.

On Aug.13, Hurricane Charley roared

in from the Gulf of Mexico, bringing

winds of 140 miles per hour and

spawning tornadoes. The storm

knocked down trees, power lines and

poles in the Peace River Electric

Cooperative subscriber area. 

Damage was huge, according to

Brad Kimbro, Peace River’s vice president of marketing and member services: “Two-thirds of our system suffered significant damage; and onethird of that was simply gone.” 

That wasn’t all. Two weeks later,

just as soon as Charley’s damage had

been repaired, Hurricane Frances

marched through with huge amounts

of rain and extensive flooding.

Mercifully, it did less damage than

Charley, but still knocked out power to

a significant number of customers. And

Frances was followed three short

weeks later by Hurricane Jeanne,

whose high winds pummeled the area

with a vengeance, toppling power

poles like bowling pins. 

$42 billion in damage 

While Peace River was the hardest

hit, power co-ops in Georgia, Florida,

Alabama and Mississippi all suffered

varying amounts of damage in the

2004 hurricane season from four major

storms in rapid succession: Charley,

Frances, Ivan (which missed Peace

River) and Jeanne. The 2004 hurricane

season, which totaled nine hurricanes

altogether, caused more than $42 billion worth of damage — the most

costly hurricane season in history.

Damage was even greater than in

1992, when Hurricane Andrew devastated southern Florida, causing $35

billion in damage.

Charley’s Angels

Utility co-ops show true colors sending aid

to Hurricane Charley-ravaged Southern states 

A lineman from Cuivre River Electric Cooperative of Troy, Mo.,

unreels replacement cable while repairing lines in Florida. Electric

co-ops from 15 states sent employees to help reconstruct power

distribution systems in hurricane-damaged areas. Photos by Jeff

Joiner, courtesy Association of Missouri Electric Cooperatives

F
Rural Cooperatives / January/February 2005 23

Despite widespread damage to

power distribution systems, electric coop customers had their power restored

in surprisingly quick time in all cases,

an outcome that was made possible by

the dedication of their maintenance

personnel and the help of fellow coops around the country. More than

100 co-ops from 15 states sent hundreds of linemen and other workers

with equipment to rebuild distribution

infrastructure. And while the scope

and severity of the damage were much

greater than anyone was used to, the

way it was handled was in many ways

routine.

As the path of Hurricane Charley

began to develop, a call for help went

out from state electric cooperative

associations in the threatened areas.

Rob Land, the director of risk management for the Association of Missouri

Electric Cooperatives, was attending a

conference in Savannah, Ga., with

Doug Drake, the association’s field

training director, when Charley hit.

Both put in long hours on their cell

phones in their hotel rooms, keeping

notes on scraps of paper as they gathered information about available

resources from member co-ops,

matched it up with assistance requirements, and put together a workable

deployment plan. “One problem was

that we only had one cell-phone charger between us,” chuckles Drake.

Quick assessment crucial 

Drake points out that if the affected

co-ops do damage assessments as

quickly as possible, it helps the assisting co-ops allocate the resources at

hand most effectively. 

As the co-op managers were notified, they in turn asked their employees for volunteers to pack up and move

their equipment to the affected areas.

“We never have a problem getting help

for this kind of thing,” says Drake.

“Most of the people are anxious to

go.” This is despite the fact that workers know they will be facing long hours

of hard work in difficult conditions —

up to 18 days, in this case — and that

they may have to put up with lessthan-ideal sleeping and bathing

arrangements. 

The biggest problem, he says, is not

in getting people to go, but in deciding

who is going to stay behind. “When

we’re dedicating resources, we have to

remember that something could happen at home while we’re away.”

Regardless of the irregular conditions under which Land and Drake

were working, they managed to put

together an expedition to the south

that arrived in Mississippi just in time

to start putting things back together in

Charley’s wake.

“We’d never worked in that kind of

environment before,” Drake says.

“The damage was similar to that we’ve

seen with tornadoes, but it was much

more widespread. And the working

environment was different, too, with

lots of sand and marshland. Our guys

had to learn how to get their trucks

around in the sand by lowering their

tire pressures.”

Being from the Show-Me State did

have its advantages, though, as a local

line crew found out when they were

faced with the job of digging a hole in

a concrete slab. “They didn’t know

what to do, because they weren’t

equipped for it,” says Drake. “But our

guys have to dig through rock all the

time, so our augurs have tungsten-carbide teeth on them.” It was one case of

people from Missouri showing someone else. “They drilled through that

concrete with no trouble at all.” 

Co-op aid from near and far

Among other states that sent help

to hurricane-affected areas were

Oklahoma, Illinois, New Jersey and

Pennsylvania. Kentucky alone sent

almost 100 workers and 60 trucks from

12 rural electric cooperatives. Many

who stayed home also put in long

hours: the Kentucky Association of

Electric Cooperative’s transformer

manufacturing plant and the United

Utility Supply Cooperative, also headquartered in Kentucky, put in long

hours of overtime, including weekends,

to make rewiring supplies and replacements for damaged distribution equipment. 

Bill Davis, Service Manager of

White River Valley Electric

Cooperative in Branson, Mo., agrees

with Drake that getting linemen to

Employees from Poplar Bluff, Missouri's

Ozark Border Electric Cooperative and other

out-of-state co-ops had to adapt to working

in Florida’s high humidity, soft sandy soil and

marshes. 

Clouds of bugs bothered linemen working

to restore power on the Gulf Coast, including this one from White River Valley

Electric Co-op. 
24 January/February 2005 / Rural Cooperatives

volunteer for the trip wasn’t hard.

“The guys knew there’d be problems,

that they might have to sleep in the

trucks,” he says. “Even when we have

storms at home it’s not easy — they

have to work 15 or 16 hours a day.

They knew we had a job to do, and so

they just went and did it!”

Davis says that it took the trucks

almost two days to travel the 750 miles

to the storm area because of government commercial driving regulations.

“They waived the rules in Alabama and

Mississippi, so we were able to drive

straight through,” he says.

Their first stop was Singing River

Electric Cooperative, headquartered in

Gautier, Miss. Singing River was damaged relatively lightly by Charley, so

after a couple of days of work, crews

headed east into Alabama, where they

spent 12 days repairing damage to

Clarke-Washington Electric

Membership Corporation, headquartered in Jackson.

John Davis of Ozark Electric

Cooperative in Mount Vernon,

Missouri, says that the first lodgings

offered his linemen in Singing River

Co-op’s subscriber area were “pretty

bad.” It wasn’t the fault of the local coop, he says. The problem was that so

many people had been forced out of

their homes, the only rooms left were

in an old motel that had recently

reopened after being closed for a long

period. But the reactions of the local

people to the appearance of the out-ofstate crews helped make up for the

grubby conditions: “They were real

happy to see us.”

Small, 4WD trucks prove value

When it came to choosing which

equipment to take south, White River

went against the grain. While most of

the assisting co-ops brought large “line

bucket” trucks and other heavy equipment, Bill Davis’s crew brought small

“service” buckets mounted on fourwheel-drive vehicles, which allowed

them to reach downed lines in areas

the heavier trucks couldn’t reach.

Meanwhile, back in Peace River’s

subscriber area, power was almost

completely knocked out. So it was with

relief, tinged with amazement, that

residents watched help arrive in the

form of a parade of almost 100 bucket

trucks, augurs, pole setters and other

equipment. In all, about 700 co-op

men and women from 15 states

descended on Wauchula to help clean

up after Charley. 

With almost all power knocked out,

Peace River had figured it would take

months to get all its subscribers back

on line. But with the help of their fellow co-ops, power was back on for

everyone in only two weeks.

Unfortunately, nobody had much of a

chance to enjoy it.

“Just as soon as we got cleaned up,

Frances came in,” says Kimbro.

Compared to Charley, which had

“They finished the

job in 5 hours. 

If we’d done that

stretch by ourselves,

it would have taken

us 5 weeks...” 

—Brad Kimbro
Rural Cooperatives / January/February 2005 25

brought mostly high winds and tornadoes, Frances was less powerful, but

moved much more slowly. As a result,

it dumped a terrific amount of water

on the area, causing extensive flooding

and, again, many downed lines. 

This time the help wasn’t as plentiful, because Frances cut a much wider

swath, covering most of Florida, and

co-ops all over the state needed help.

Nevertheless, as many as 200 outside

co-op personnel showed up again to

help put things right. 

Ivan followed soon after. Projected

to take the path of Charley, it swung to

the west instead, sparing Peace River

but hammering Alabama and the

Florida panhandle before moving north

and east over land toward Virginia.

Later, it moved out to the Atlantic,

looped south and west to cross Florida,

and finally expired in Texas.

Spared by Ivan, and with things up

and running for the second time, Peace

River sent some of its crews to the panhandle to help out there. Unfortunately,

however, Mother Nature was far from

finished with them. 

Hurricane Jeanne pounced from a

different direction than the others —

the east. Its winds, while not quite as

strong as Charley’s, were still strong

enough at 120 miles-per-hour to do

extensive damage to an area still recovering from the previous two storms.

“We had a four-mile stretch of highway where every single pole was

down,” says Kimbro. About 140 threephase distribution poles on that highway alone had to be replaced or reset. 

Again, outside co-ops came to the

rescue, with about 250 linemen and

other workers. “We had 75 trucks

working to restore those lines. They

finished the job in 5 hours. If we’d

done that stretch by ourselves, it would

have taken us 5 weeks,” Kimbro says.

Co-op staff also hard hit

While the volunteers made sacrifices,

the employees of the affected co-ops

were hit hard — working long hours, in

some cases, for weeks on end, as in

Peace River. On top of the extra work,

Peace River employees had to deal with

the effects of the storms on their own

lives and those of their families. 

The co-op had over 70 employees

who suffered losses from the storms —

and 13 of them lost everything. “Our

communications manager was one of

those,” says Kimbro. “She noted in a

TV interview that Peace River

employees had suffered losses, and

never hinted about her own.” Kimbro

thinks that the shared ordeal has

strengthened the employees’ relationships with each other and the co-op as

a whole.

Kimbro also remembers with gratitude the support Peace River received

from co-op personnel who were unable

to be on the scene. “Central EMC in

North Carolina couldn’t spare personnel, but they sent a big care package

with soap, sunscreen, deodorant and so

on,” he says. Other co-ops donated

clothing, and the National Rural

Electric Cooperative Association sent

$4,500 for Peace River employees who

suffered damage. “I was really

impressed when I found that the

money was from NRECA employees.”

Brad Kimbro says he is “really humbled” by the effort made by his own coop’s employees and by hundreds of

employees of fellow co-ops to get Peace

River’s subscribers back on-line. “I hope

they never need help like we did,” he

says, “But if they do, we’ll respond.” ■
26 January/February 2005 / Rural Cooperatives

By Janet Ciccone,

Director of Communications,

College of Human Ecology,

The Ohio State University

e-mail: Ciccone.2@osu.edu

etail cooperatives wanting to retain members

and encourage their participation in programs

would do best to foster

feelings of identification within the

group to increase interactions, rather

than force conformity to group goals.

This is according to a study by

Leslie M. Stoel, assistant professor of

merchandising management at The

Ohio State University, College of

Human Ecology. The results of her

study, which appeared in the Journal of

Small Business Management, apply to

retail cooperatives in other industries

and to many types of franchises, even

though data were collected from the

hardware industry. 

U.S. retail hardware cooperative

groups have increased their membership in the last decade, some as much

as doubling. This is in part due to coop mergers, and in part due to independent retailers joining cooperatives

to work toward results that they cannot achieve individually.

Cooperatives offer a variety of programs that, in the past, were all voluntary. Today, however, co-ops increasingly rely on prescribed programs. 

“From our study, we found that

strength of identification by the co-op

member with the coop influences the likelihood that members

will participate in the

voluntary co-op programs,” Stoel says.

“Specifically, if they

identified strongly

with the co-op, if they

considered their role

as co-op members

more important than

their role as a store

owner, they were

more likely to adhere to the norms of

the group, such as adopting a new sign

program or a new computer program.”

At the same time, however, Stoel

notes that identification with the co-op

should not be confused with conformity. “High levels of forced conformity

to group goals can be divisive,” Stoel

says. “Care should be taken in ordering conformity, because it may lead to

within-group conflict, ultimately splitting the group.” 

Hardware stores surveyed

Stoel surveyed 147 retail hardware

store owners that had five or fewer

employees and less than 10,000 square

feet of retail space. Half of the stores

had a sales volume of under $1 million.

The stores answered a series of

questions about being a member of the

co-op group and about their competitive situation. Each store was located

in a geographic area where it competed with a hardware store that belonged

to another hardware cooperative. 

Stoel also looked at how belonging

to the co-op affected members’ perceptions of rivalry toward stores in

their geographic area belonging to a

different co-op. She asked: If Ed’s TruValue Hardware is competing for customers against Fred’s Ace Hardware,

to what extent will belonging to the

TruValue cooperative influence Ed’s

perceptions about Fred as a rival for

local customers?

Stoel found that the importance a

co-op member attaches to being a

member of the group influences

his/her perception of conflict with a

rival party and beliefs about what

behavior was appropriate in response. 

“The majority of respondents considered their primary competitive rival

as being the Big Box stores (e.g., Home

Depot, Lowe’s), despite the proximity

of the store belonging to the rival coop,” Stoel said. “Another small fraction

Retail co-ops advised to

foster member identification,

not force conformity

continued on page 32

R

Some 20,000 U.S. hardware stores belong to a cooperative, with

Ace and Tru Value being two of the largest. Photo courtesy Ace

Hardware 
Rural Cooperatives / January/February 2005 27

By Dan Campbell, editor

onald McDonald wasn’t

officially registered as a

guest or a speaker, but

his presence was certainly felt during the joint

annual meeting of the National Milk

Producers Federation (NMPF) and

Dairy Management Inc. (DMI), the

planning and management organization formed by the National Dairy

Promotion and Research Board

(NDB) and United Dairy Industry

Association (UDIA). The meeting,

held in Reno, Nev., was filled with

good news for dairy producers and

their co-ops. Some of the best reports

concerned the rapidly increasing sales

of single-serve milk containers at two

of the nation’s largest fast food

restaurant chains: McDonalds and

Wendy’s. 

Wendy’s led the way by offering

single-serve milk in plastic bottles as a

substitute for soda in its kid-meal

packs. Within a year of introducing

the new milk packaging, sales shot up

from about 65,000 milk cartons to

more than 1 million plastic bottles of

milk per week, according to DMI

CEO Thomas Gallagher. McDonalds

soon followed suite, and saw its milk

sales rocket from 600,000 cartons to

4.2 million bottles weekly.

Other fast food chains are expected to join the party as production

capacity is ramped up to meet the

surge in demand, producers were told

at the meeting, held in late October.

R

Paper or plastic?

For single-serve milk market, there is no debate as

plastic sales soar, bringing smiles at dairy conclave

The exhibit hall at the dairy conference featured 

samples of a wide array of new dairy foods, many of

which are being developed with help from the Dairy

Checkoff Program. USDA photos by Dan Campbell 
28 January/February 2005 / Rural Cooperatives

Many reasons to cheer 

There were plenty of other reasons

for good cheer at the conference,

including big wins on the legislative

front, higher on-farm

milk prices thanks to

the industry’s supplybalancing actions, and

an increasing number

of school districts getting back on the milk

bandwagon. 

Another cause for

optimism was the way

the entire industry —

producers and their

co-ops, food processors, retailers and

nutrition and health experts — are

uniting behind the “3-A-Day” promotional campaign. That effort builds on

the newest version of the USDA food

pyramid, which has bumped up the

number of recommended daily servings of dairy products from

two to three per day. New

dietary studies are also

showing that milk can play a

part in fighting the obesity

epidemic.

The 3-A-Day campaign

shows that producers can

look at food manufacturers

“not as the enemy, but as

powerful partners,”

Gallagher said. And to those

who think food pyramid

placement doesn’t mean much, he

pointed out that it helps to trigger

government food purchases for use in

feeding programs and the menu choices made by school districts and health

professionals. Last year alone, school

lunch and Women, Infants and

Children (WIC) feeding programs

made about $16 billion in purchases.

DMI Chairman Paul Rovey said the

industry has traditionally been slow to

respond to changes in the fluid milk

market and has not been active enough

in meeting the challenge as “others

hedged-in on dairy’s calcium advantage.” But the dairy industry has

become more flexible and proactive, as

the marketing gains of the past year

show, said Rovey, an Arizona dairyman.

Now the industry needs to capitalize on the finding that dairy calcium is

a useful tool in fighting obesity, which

may prove to be “the most powerful

Doug Sims, CEO of Denver-based CoBank, told national

dairy conference attendees that consumer-driven co-ops

will be the winners in the years ahead because “the consumer is driving the bus that all of agriculture is riding on.”

For many, the ability to capitalize on market niches will also

be crucial as is their capability to work together to strengthen the market position of co-ops. Co-ops must further show

how they are different and what makes them unique — to

demonstrate that they add value for members, customers

and employees, said

Sims, who grew up

on a dairy farm.

CoBank and its

affiliated agricultural

credit associations in

the U.S. Farm Credit

System support the

dairy industry with

more than $2 billion in

loans outstanding to

agricultural cooperatives, dairy processors and dairy farm

operators.

Sims told attendees at the annual

meeting of the National Milk Producers Federation, United

Dairy Association and National Dairy Promotion and

Research Board that the dairy industry today has “more

influence than any other livestock industry because you are

working together.” For example, Sims pointed to the milk

supply/demand balancing program of Cooperatives Working

Together (CWT) as “a real success that shows the industry

is united.” 

He encouraged continued cooperation, noting that coops need to collaborate to fund research and development

— as the dairy industry is — and should even try working

with competitors. 

At a time when only a handful of retail chains control

approximately 40 percent of

food sales in the U.S., Sims said

through cooperation, co-ops

can and must create market

power. The rate of concentration in food retail markets is

likely to accelerate rapidly, he

predicted, and co-ops must

establish market position with

these top food retailers. 

“Investing in new ways to

collaborate, investing in new

products, new markets and

new ways of thinking about

your value proposition are critical success factors,” Sims said. 

Sims added that the dairy industry’s willingness to fund

new, innovative products is paying off. He pointed to the

CoBank CEO: Gear co-ops to consumer demand 

“The consumer

is driving the

bus that all of

agriculture is

riding on.”

—Doug Sims

“The consumer

is driving the

bus that all of

agriculture is

riding on.”

—Doug Sims
Rural Cooperatives / January/February 2005 29

dairy nutrition message ever,” Rovey

said. 

“Five years ago, we saw that obesity

would be ballooning as a health issue,

and we wanted to make sure dairy was

part of the solution, not the problem,”

Gallagher said.

The point hammered home

throughout the conference was that

most of these marketing successes can

be traced back to work funded by the

Dairy Checkoff program, under which

producers pay 15 cents per hundredweight to fund promotion and

research. 

CWT helps balance supply

Under the NMPF banner, dairy

producers helped to boost on-farm

milk prices this past year by using the

industry’s success in introducing “low-carb” products to

satisfy changing consumer preferences as one example.

Citing research from Productscan Online, Sims noted that in

the first five months of the past year, dairy processors introduced 62 “low-carb” ice creams. In contrast, there were

only 19 “low-carb” ice creams in 2003 and in 2000 there

were none. 

“Consumer-driven co-ops will be the global winners,” he

said. “The consumer by far is the key driver in the food system. In the U.S., the consumer is “king and queen.” 

Sims also acknowledged the changing global marketplace, noting that governments are reducing barriers to

entry and providing access to U.S. markets. Specifically

with regard to the Farm Credit System, Sims said that FCS

owes thanks to the dairy industry for supporting efforts to

oppose the sale of a key Farm Credit System lender to Dutch

banking giant Rabobank this past year. He stressed the

importance of farmers having a locally owned and controlled cooperative lender.

Another key factor to watch in today’s business environment, according to Sims, is the effect of recent scandals on

the image of corporate America. Good governance practices

by co-ops will help avoid such scandals, he advised. He

posed a series of questions to encourage co-op attendees to

engage in critical self-examination of their business practices, governance policies and business focus. “What do you

offer members that they value? Why should retailers take

your products? Why do employees want to work for you?

What is the difference between your co-op and the business

down the road? What training do you provide your directors?

If patronage returns are the only way a co-op returns

value to members, it will ultimately prove to be a losing

proposition, Sims continued. Co-ops must also deliver superior service and convenience, and provide access to domestic and global markets at a competitive price. 

He further urged co-op leaders at the meeting to determine whether their capital plan will meet demands of equity

retirements, business growth, product research and development and other needs. If outside capital is being raised,

how will it affect the governance of the co-op? “And does

your co-op have the right skills on the board? Do directors

understand the co-op’s strategic plan? How is the co-op

measuring progress?”

If directors lack skills, get training for them, he stressed,

and remember that every meeting is a director-training

opportunity. Sims said he is a proponent for using outside

(non-member) directors to bring valuable expertise to the

board, which can range from help with product development

to greater financial acumen. 

The most important function of a co-op board is hiring the

CEO or manager, Sims continued. To do it right, and to monitor his or her performance, directors must be able to ask the

right questions. 

“The keys to success today and in the future is all about

investing in the right things — people, strategy and business

execution,” he emphasized. “Co-ops need to critically

examine the combination of expertise reflected in their

boards and management teams, re-evaluate their business

focus in light of changing markets and challenges, and collaborate in efforts to deliver innovative products quickly and

efficiently.

“Working together, co-ops can invest in a better future,

and continue to make a definitive difference in the marketplace,” he concluded. ■ — By Dan Campbell

“After 18 months of

depressed milk prices,

doing nothing was the

riskiest course of all...”

—Jerry Kozak
30 January/February 2005 / Rural Cooperatives

CWT program to better balance milk

supply with demand. CWT is an industry-funded, self-help program under

which some producers contribute to a

special fund that helps reduce excess

milk production capacity by paying

some producers to retire from the

industry and by providing export assistance for selected dairy products.

“To some, CWT was a crazy, betthe-farm wager,” said Jerry Kozak,

NMPF president and CEO. “But others were confident that it was a sound

investment for the dairy industry, and

they were proved right.” Indeed, the

program was renewed on July 1 for

another year. 

“After 18 months of depressed milk

prices, doing nothing was the riskiest

course of all,” Kozak said. No one is

claiming CWT was entirely responsible for higher on-farm milk prices last

year, but it was definitely a “tailwind”

that can probably take credit for a

price increase of 60 cents per hundredweight, he noted. 

“CWT needs to be part of the

industry’s long-term portfolio,” Kozak

stressed.

There were also key successes on

the legislative front, including a fullcourt-press lobbying effort that resulted in no major increase in dairy product imports from “down under” as a

result of the Australia Free Trade

Agreement. NMPF Chairman Charles

Beckendorf said that trade deal would

have been “anything but free for our

dairy producers.”

NMPF staff and co-op representatives spent “countless hours” knocking

on doors on Capitol Hill to carry the

dairy producer’s message to Congress

and the Bush administration. They

even bought a full-page ad in the

Washington Times to run an open letter

to President Bush, telling him how

crucial trade and other legislative

issues are to dairy producers. 

Beckendorf said that there will still

likely be a slight rise in dairy imports

into the United States in coming years,

but that it will be “a drop in the bucket

compared to what it could have been.”

Politics and government policy will

always be a big part of the dairy industry, Kozak said, quoting Charles

DeGaulle’s comment that “politics is

too serious to leave to politicians.”

Campaign finance reform has not

removed the need for political action

committees, he added. “Federal officials want to know what people are

thinking, and you must stand out from

the crowd to be counted.” 

Working in partnership with IDFA

(International Dairy Foods Assoc., a

food processors’ trade group) was “a

risky gamble,” given that the organization “has so often been at odds with

us,” Kozak said. But successes in

school lunch lobbying and other areas

has proven it to be a good business

move, he added. 

School sales gaining 

The dairy industry successfully supported legislation passed by Congress

earlier this year that requires school

districts to offer students at least two

types of milk and would forbid schools

from entering into exclusive contracts

with soft drink companies that restrict

the sale of milk products at school

functions. 

Beckendorf said the industry’s ability to work with schools is vital, because

improved milk products must be

placed in front of the nation’s youth at

a time when they are forming lifelong

dietary habits. As one speaker said, “if

they drink milk at 16, odds are they

will still be drinking it at 86.” 

Test marketing showed that inschool milk sales would jump 30 percent when the switch was made to resealable plastic bottles. But last year’s

results were even better, up 34 percent

in schools where the change was made,

Gallagher said. And this year the number of schools offering the improved

packaging will jump from 1,200 to

3,000, meaning the industry needs

“more processors to step forward” with

the product, he added. 

Mad Cow response

The discovery of mad cow disease

(BSE) in a single animal in Moses Lake,

Wash., in December 2003 could have

been a disaster for the dairy industry,

but a crisis communications plan was in

place for that eventuality, leading to the

flow of the type of prompt, reliable

information needed to reassure the

public and media about the safety of the

nation’s dairy foods and herds. 

Beckendorf said the biggest outcome of the BSE discovery will be the

eventual creation of a national animal

identification program that will enable

any disease problem to be traced back

to the exact source so that it can be

nipped in the bud. 

With a lean staff of only 17,

Beckendorf said he knows of no other

ag commodity organization that does as

much for its members at does NMPF. 

New direction for promotion 

William Siebenborn, a Missouri

dairyman and UDIA chairman, said

forging a single dairy marketing plan

and vision will help boost worldwide

demand for U.S. dairy products. Under

this effort, what had been primarily an

advertising and classroom-based dairy

promotional program has transitioned

to one that leverages partnerships with

the industry. It was not a quick or easy

transformation to complete, he said,

adding that the effort starts with local

dairy promotion boards. 

“Kids don’t read or study the food

pyramid,” he said, so product presentaWhile dairy foods

are very nutritious,

they are being “outmarketed and outscienced by the competition.”

—Kevin Toland
Rural Cooperatives / January/February 2005 31

tion to them is all important. “Milk

won’t be cool just by saying it is in

ads,” he continued. “We need the right

products in the right places — availability is the key.” So emphasis has

switched from running health-oriented

ads to creating milk products with

more pizzazz.

“Now the concept is to work within

marketing chains to get improved

products into more outlets,” Gallagher

said. He cited Yoplait Yogurt as an

example, noting that it will print the 

3-A-Day logo on all of its yogurt lids.

“That’s 2 billion packages annually that

moms all across the country will be

seeing,” he said.

William Ahlem, Jr., a Hilmar, Calif.,

dairyman and NDB chairman, said it

takes an enormous logistical effort to

get new dairy products into stores and

fast food restaurants. The industry has

felt “tremendous frustration” for many

years with school districts for not being

more willing to include more milk and

dairy products on their menus.

A door of opportunity was thrown

open to the dairy industry when the

Surgeon General issued a warning that

the nation is facing a calcium-deficiency crisis, Ahlem continued. The report

said 7 of 10 boys and 9 of 10 girls are

deficient in calcium. Other reports

indicate that the nation’s epidemic of

obesity is increasingly spreading to our

children. Dairy Checkoff-funded

research shows that calcium helps burn

body fat, Ahlem noted. 

Low-carb milk?

About 7 percent of the U.S. population is now on a low-carb diet, and 24

percent say they are watching their

carbs, it was noted. 

John Kaneb, CEO and chairman of

HP Hood, a New England dairy company with seven national dairy brands

and $2.3 billion in annual sales, said

Hood spent $25 million in 2004 to

develop a new low-carb milk, called

Carb Countdown. That effort was

Former Louisiana Rep. Bob Livingston, who chaired the

House Appropriations Committee during his tenure, told

producers they must continue to find effective ways to

make their needs known to their elected officials. “You may

be convinced in the righteousness of your position, but

there is always someone just as fervent on the other side,”

said Livingston, who retired from Congress in 1999 and now

operates a lobbying firm. 

“You need to frame and condense your message so that

they listen to you, rather than the other guy. That’s why we

band together in trade

associations and hire

lobbyists and attorneys

— to study, advocate

and lobby.” 

Congressional representatives are incredibly

busy, he said, so you

can’t waste their time.

“You must be ready to

make your case in 15 to

30 minutes.” He advised

letting elected officials

know that a large number of their constituents

favor the position you

espouse, and hammer that point home by having constituents contact the official prior to, or immediately following, your meeting. “It is incredibly important to have grassroots activity back home support your position,” Livingston

said. 

He advised producer groups to find out when one of their

elected officials will be back home, and then volunteer to

host a fact-finding session for them. These can take the form

of a town hall-type meeting with constituents, a tour of farms,

etc. Having your political action committee hold a fund-raising barbecue on a member’s farm is also a good idea. Such

an event can be 90 percent fun, but the critical time “is the

half-hour you spend discussing your key concern.” 

Members can also become activists in campaigns, he

noted.

“Tighter budget caps are coming for farm programs,

which means you must make your voice even louder,”

Livingston said. 

He noted that the dairy

industry failed last year to

close a loophole that is allowing imported casein-protein

to enter the United States,

which means the industry

needs to worker harder next

year to close the loophole. 

“Continue to work to make

sure free trade means fair

trade, and work to hold your

seat at the table so you don’t

wind up as the main course,”

Livingston advised. “Oppose

unilateral disarmament [in

trade talks]. Keep pressure on your elected officials all

year long.”

Congressional oversight of agriculture is critical, but

over-regulation is not, he said. “If government does not

provide sufficient oversight, you get monopolies and lack of

competition.” But too much regulation will stifle the industries it is supposed to help. ■

“Tighter budget caps

mean you must make

your voice even louder...”

—Bob Livingston 

Livingston gives producers legislative tips 
32 January/February 2005 / Rural Cooperatives

launched following a request from

Wal-Mart in 2003 for such a product.

Kaneb, whose family purchased Hood

in 1995, said even a company of

Hood’s size can’t go on putting that

kind of money into new product development indefinitely. 

Hood would like to find ways it can

work with dairy co-ops and NMPF to

get more help in the early stages of

product development, he said. “Dairy’s

competitors have many advantages.

They either control raw materials, or

the raw materials are so cheap — as in

the case of soda — that they don’t

need to control them,” he said. 

Kaneb indicated that help from

dairy producers might come in the

form of allowing processors to avoid

having to pay Class I prices for milk

being purchased for use in some of

these promising new products.

Hood also makes Lactaid, a bestselling, lactose-free milk. It too is

expensive to process and package, as it

must be processed with enzymes.

Hood has to buy five gallons of milk to

make four gallons of Lactaid, Kaneb

said, “so producers should love it.” 

Other meeting highlights:

• U.S. Agriculture Trade Ambassador

Allen Johnson said the goal in ongoing trade talks is to establish the level

playing field that farmers demand.

He said President Bush has made ag

trade a priority, and that “without

agriculture, there is no trade agenda.” He urged farmers to continue to

make their voices heard, noting that

their coffee shop discussions funnel

up to farm and co-op meetings that

eventually help set trade policy. He

noted that the EU and some other

competitors far out-spend the

United States on export subsidies

and trade-distorting domestic supports, and they erect far more tariff

and non-tariff barriers. 

• Emphasis is being placed on development of new cheese snacks, which

is important because a slowdown is

expected in the growth in demand

for cheese from pizza makers. 

• Almost all consumption gains in the

beverage category are being achieved

by health beverages, led by bottled

didn’t seem to perceive a rivalry at all,

instead focusing on their customers.”

However, 28 percent of the respondents perceived that their No. 1 competitor was the other hardware store

that belonged to a rival cooperative.

With 20,000 hardware stores belonging to cooperatives in 1996, this number is noteworthy. For these members,

feelings of identification with the

cooperative group resulted in increased

perceptions of conflict with the member of the competing cooperative.

These feelings influenced their beliefs

about the importance of competitive

behaviors relative to that rival. 

“It is critical that we understand

how belonging to the group can influence perceptions and behavior,” Stoel

said. “Hardware retailers must compete on two fronts — against “category

killers” and group-affiliated retailers.

They will want to make careful choices, especially since research shows that

intense rivalry is associated with poor

performance.”

Strategies for retail co-ops

To help cooperatives operate to

maximum advantage, Stoel recommends that they focus on helping

members develop a sense of belonging

and appreciation for their membership.

She suggests that co-ops could consider the following:

• Offer programs that accommodate

members in diverse competitive situations, i.e., allow variations in programs to keep them relevant to different situations. Examples of variations for different competitive situations are as follows:

a. An advertising/promotion program (or store interior and signage

program) for stores that compete

heavily with Big Box stores,

another program for stores that

compete mostly with another coop

store, and perhaps another for

those that compete mostly with

Wal-Mart or other general merchandise discounter.

b. Merchandise/inventory assortment programs for rural stores,

urban stores and suburban stores,

or programs targeted by region

(e.g., southern vs. midwestern or

northern, due to climate differences, housing differences, etc.).

c. Human resource development/

training programs based on education level/workforce readiness of

potential workers (e.g., program

needs for rural and urban stores

may differ in some cases from suburban needs).

• Educate members about benefits of

conforming to co-op programs, especially in terms of customer appeal

(e.g., answer the question: how will

this program improve customer perceptions and responses?). One method

of education would be to obtain and

publicize customer response to pilot

tests of new programs.

• Provide opportunities for co-op

members in similar competitive situations to network with other members and with co-op management

(e.g., using online bulletin boards or

discussion boards).

Stoel’s recommendations about

rivalry are to be aware of it in order to

stay sharp but focus on your customers. What can you do, with the

help of your co-op, that your rival

can’t do? Or what you can do better

than your rival, with the assistance of

your co-op? ■

Retail co-ops advised to foster member identification, not force conformity continued from page 26
Rural Cooperatives / January/February 2005 33

water, which has doubled its sales

since 1998. Low-carb drinks are up

67 percent, while milk is up only

about 1 percent since 1998. Drinkable yogurts have been a bright spot

for dairy, with sales quadrupling

since 1999.

• Soy beverages “tried to grab a bigger

piece of the action” from real milk in

2004, which the dairy industry is

countering with efforts to keep the soy

drinks from being labeled as “milk.”

• Some soda-pop companies, including Coke and Schweppes, are experimenting with dairy soft drinks containing about half milk. This is

largely seen as negative for dairy

producers, in that these drinks

would be marketed as a milk

replacement (and would thus cannibalize existing milk sales). On the

plus side, these companies have the

ability to get the drinks into convenience stores and vending machines,

where dairy struggles for a bigger

presence. One speaker said soft

drink companies may have designed

these products simply as “place

holders” to fulfill school contracts

requiring that dairy beverages be

offered to students. Both companies

have currently pulled their dairy soft

drinks off the market, but others are

likely coming. 

• Kevin Toland, executive director with

Irish dairy co-op Glanbia PLC,

reported on a major new cheese plant

being built in New Mexico as a joint

venture with DFA. The new factory

will be one of the largest and most

efficient cheese plants in the world,

processing over 2.4 billion pounds of

milk and producing in excess of 250

million pounds of cheese and 16.5

million pounds of high-value-added

whey proteins annually. Variety, convenience and healthful nutrition factors are driving consumer choices, he

said, calling nutrition a “worldwide

mega-trend.” While dairy foods are

very nutritious, they are being “outmarketed and out-scienced by the

competition,” he said. “Even on calcium, we are being beaten by rawcalcium supplements.” He said using

more dairy products, such as whey, as

food ingredients and nutritional supplements, looks very promising, and

he gave a detailed overview of the

potential market. ■

Greater stock market liquidity can

also be gained by making sure the

NGC membership has a balance of

large and small farmers as well as

farmers from a wide geographic range.

If members are affected differently by

weather conditions, local prices and

changes in production costs, then it is

more likely that at any point in time

some will want to buy shares and some

will want to sell shares. This kind of

diversity helps keep the NGC stock

market healthy.

3) Grow the pool of potential

investors.

Internet auction Web sites, such as

eBay, put sellers of myriad products in

touch with a large audience of potential buyers, greatly increasing the

chances of finding someone with

whom to trade. Analogously, the market for NGC stock can be made more

liquid if steps are taken to expand the

pool of potential NGC investors. 

The Internet can create opportunities for the inexpensive and timely

exchange of information between

farmers who have never met each

other and live hundreds of miles apart.

It can also allow potential traders to

quickly and easily adjust their prices

and quantities to reflect market conditions. While an NGC might never be

able to replicate the trading pit model

of exchange, prudent use of technology

might allow it to get closer to that

model than it ever could before.

Two key constraints that limit the

number of potential NGC investors

are: legal rules that prevent non-producers from investing in an NGC and

the cost of delivering a crop from a

distant farm to the NGC. NGCs can

do little to change the legal rules, but

they can often circumvent these

restrictions. The most common

method of expanding the pool of

potential investors is for the NGC to

enter into a joint venture or partnership with non-producers. 

In fact, many ethanol plants are

LLCs or LLPs that are partially owned

by the NGC and partially owned by

outside investors. Some NGCs have

gone a step further and chosen to convert to a non-cooperative business

form.

Other NGCs are uncomfortable

with partnerships with non-producers

because it is feared that the organization can stray from its cooperative

nature. Another possibility that does

not require outside investment is to

allow distant farmers to arrange for

delivery of corn through the exchange

of warehouse receipts at cooperating

grain elevators. This practice is currently used by some NGCs to expand

the area from which they find raw

product and has the added benefit of

increasing the number of stock market

participants.

Conclusions

The NGC model makes it easier

for farmers to invest in value-added

processing facilities, creating new

opportunities for profit-making and

diversification. But thin markets for

NGC stock can limit farmers’ ability

to adjust their holdings and can leave a

cooperative vulnerable to takeover by

an IOF. The thin market problem cannot be eliminated, but it can be alleviated through careful design of stock

trading procedures, diversification of

membership and expansion of the pool

of potential investors. 

■

Co-op stock exchange continued from page 14
small ethanol producers, including

cooperatives. These are companies

with production capacity that does not

exceed 30 million gallons of ethanol

per year. The credit can be claimed on

production of up to 15 million gallons

of ethanol per year. 

The new law allows cooperatives to

choose to pass some or all of the small

ethanol producer credit through to

their patrons. The credit is to be apportioned among patrons on the basis of

the quantity or value of business done

with, or for, such patrons during the tax

year. Any credit not passed through to

patrons is treated as a general business

credit by the cooperative.

Small, low-sulfur diesel fuel 

producer credit, co-op pass-through

The act creates a new, 5-cents-pergallon tax credit to small petroleum

refiners who must incur capital costs

complying with the Environmental

Protection Agency’s rules limiting the

sulfur content of diesel fuel. Eligible

refiners may claim the credit until

they have recovered 25 percent of

such costs. For these purposes, a

small refiner is one that employs not

more than 1,500 persons directly in

refining and has less than 205,000

barrels per day (average) of total

refining capacity. The credit is

reduced for refiners with a capacity

between 155,000 and 205,000 barrels

per day. The conferees’ report states

that when capacity “differs substantially” from average daily output of

refined product, capacity should be

measured by reference to average

daily output.

Cooperatives may also choose to

pass some or all of this credit through

to their patrons. As with the small

ethanol producer credit, any passthrough is to be apportioned among

patrons on the basis of patronage and

any credit not passed through to

patrons is treated as a general business credit by the cooperative. 

■

34 January/February 2005 / Rural Cooperatives

New tax law includes several cooperative provisions continued from page 21

TFC’s $447-million sales year

sets record; income also climbs 

A good year for Tennessee

farmers, bolstered by excellent

growing conditions, translated

into record sales for Tennessee

Farmers Cooperative (TFC), a

regional farm supply and service

organization owned by 64 local

co-ops across the state. TFC’s

sales topped $447 million for the

fiscal year ending July 31, 2004.

That’s a gain of $35 million from

2003. Net income before taxes

and member programs was nearly $11

million, an increase of more than $2.7

million since 2003. 

TFC, following a five-year plan

enacted in August 2002, also strengthened its financial standing by increasing working capital to $17.1 million —

a $3.6 million increase over 2003 and

up $10.7 million in two years. TFC

also returned more than $6.5 million

in cash to member co-ops through its

member marketing allowance, performance and patronage programs. 

Both Board Chairman Larry Paul

Harris and CEO Vernon Glover

praised the efforts of management and

employees in a banner year for the coop as they reported the results at

TFC’s annual meeting Nov. 29 in

Nashville, attended by nearly 1,000. In

addition to outstanding crop yields,

farmers statewide also received good

prices for crops and livestock. 

Glover said fertilizer volume was

462,000 tons, while feed sales were

up $860,000, with increases in minerals and beef, horse, goat and sheep

feeds. The Home, Lawn, Specialty

Department recorded the most profitable year since 1997. All of the Ag

Distributors Inc., (ADI) subsidiary

operations were profitable and had

sales increases. Sales of FFR seed

increased, as did sales of crop protection, hardware, TBA (tires, batteries,

accessories) and animal health products. “As we have grown our business,

we have also emphasized expense control, inventory management and the

reduction of long-term debt.”

Harris challenged management and

the membership to work together to

maintain the momentum as they

address the issues of a “changing agricultural climate that holds a lot of

NEWSLINE

Send items to: dan.campbell@USDA.gov

TFC’s member store construction projects have continued at a record pace. Henderson Chester Farmers

Cooperative was rebuilt after a tornado destroyed the

old one in 2003. Photo courtesy TFC
Rural Cooperatives / January/February 2005 35

pound), otherwise it risks losing supplies. This is a source of tension

between shareholders, who receive dividends per share, and growers. 

Carbone cautioned that converting

a company does not happen overnight.

The three-stage conversion process

was, in his words, “a long and painful

process.” It took almost nine-months

to complete. There are also downsides

to the process. At the top of his list

was the loss of heritage, or co-op culture. A potential change in directors

and, therefore, company vision, was

another risk. Further, the registration

requirements for a public company can

be onerous and costly. 

Sale means veggie growers

no longer control own destiny 

William Harris, a long-time ProFac Cooperative member and investor

in Birds Eye Foods, provided a growers’ assessment of his co-op’s sale of

the majority of Birds Eye stock. Over

70 percent of Harris’ gross farm

income depends on his sales to the

cooperative. Pro-Fac has always been

innovative, he noted. Like the cherry

growers in Michigan, the vegetable

growers established a “new age” co-op

in 1961 to buy failing processing companies in the region. 

In this case, however, a private

company — Curtice-Burns (which

eventually became Birds Eye Foods)

— leased and operated the processing

facilities and marketed the finished

product for the co-op. According to

Harris, the profit and losses were

shared equally between Pro-Fac and

Curtice-Burns through a series of

agreements. “The business model

worked extremely well and through

acquisitions the company grew.” 

Perhaps it grew too quickly, or too

large. In 1994, Pro-Fac purchased

Curtice Burns. By 1999, Pro-Fac was

highly leveraged and poorly positioned to take advantage of future

growth opportunities. In hindsight,

Harris acknowledged, Pro-Fac did not

retain enough of its earnings. It also

had issued a lot of preferred stock,

which led to a cumulative dividend

issue. 

Even with “their backs against the

wall,” Harris said that the decision in

2002 to sell approximately 60 percent

of its processing company and brand,

Birds Eye, to Vestar Equity Investment

was only made “after a lot of soul

searching.”

Was it the right decision? Birds Eye

Foods is certainly more financially

viable today than it was in 1999, meaning that Pro-Fac is also more stable

financially. However, as Harris somewhat wistfully noted, Pro-Fac no

longer controls its own destiny. 

If Vestar wants to sell Birds Eye, the

co-op can’t stop it. Grower-members

have limited input into the company’s

decisions. They now have a legal, contractual relationship with their processor. Pro-Fac members are left out of the

loop at the corporate level and decisions

are not as transparent as in the past due

to stronger confidentiality conditions.

As a result, Harris feels that “what

would have been small disputes between

growers and Birds Eye have now

become protracted disagreements.” 

Dave Swanson, Partner at Dorsey

& Whitney LLP, counseled cooperatives to exhaust other options before

committing to a business conversion.

“Identify your goals and examine the

options. Can you get additional capital from your members or through

joint ventures?” Alternative options

include sale of preferred stock, joint

ventures and consolidation. Each coop’s situation is unique. The potential

pitfalls and benefits of alternative capitalization methods need to be kept in

mind in order to preserve the political

and social aspects of the co-op

involved. ■

Of necessity & invention continued from page 19

uncertainty.” He noted that the 2002

Farm Census shows that the number

of Tennessee farms has climbed from

75,067 in 1992 to 87,595, but the average size decreased from 149 to 133

acres. Just 11 percent of the farms produced 86 percent of the state’s agriculture in 2002. Some 78 percent of the

state’s agricultural operations had less

than $10,000 in annual sales of agricultural products.

“More and more, we’re providing

products and services to the row-crop

farmer growing hundreds or even

thousands of acres of corn, soybeans

and cotton,” Harris said. “And, at the

same time, we’re finding ways to help a

growing number of goat producers and

selling pet and horse feeds to those

farmers’ neighbors. We’ll always be

here for our farmer owners — that’s

our focus — but we must continue to

meet the needs of all those involved in

Tennessee agriculture.” 

Humboldt Creamery acquires

WestFarm’s ice cream division 

Humboldt Creamery Association, a

Fortuna, Calif.-based dairy co-op, has

completed acquisitions that make it

one of the nation’s largest ice cream

manufacturers and have nearly doubled

its size. Rich Ghilarducci, Humboldt’s

president and CEO, says the co-op has

chosen to remain independent by

securing its future through acquisitions

and consolidating all of its operations

in California.

Recent acquisitions include: The

Aug. 1 purchase of a 40,000-squarefoot distribution facility and nine acres

in Stockton, Calif., from P&O Cold

Logistics; The Nov. 1 acquisition of

the ice cream division of WestFarm

Foods, which has facilities in Seattle,

San Jose and Los Angeles, and a license

of the WestFarm Foods/Darigold

brandof ice cream, and the Nov. 1

acquisition of Arctic Ice Cream in

Seattle, including its Arctic and

Vitarich Ice Cream brands.
“Humboldt Creamery will become a

full-service frozen dessert supplier to

the retail grocery industry and one of

the largest ice cream manufacturers in

the United States,” said Ghilarducci.

“This company expansion will allow us

to preserve our members’ pasturebased family dairies and protect green

space in Northern California for generations to come.”

In conjunction with the expansion

announcements, Ghilarducci also

announced the national launch of a

new Humboldt Creamery brand of

organic super-premium ice cream. The

product is expected to begin retail distribution in the first quarter of 2005.

Humboldt Creamery is a co-op association owned by 62 Northern California

dairy families and is the oldest active

dairy cooperative in the state. The

company, which celebrated its 75th

anniversary in October, produces a full

line of dairy products, including fluid

milk, powdered milk, ice cream and

frozen novelties, both conventional and

organic.

Record crop returns for 

Blue Diamond members 

Almond growers who deliver to

Blue Diamond received 2003 crop

36 January/February 2005 / Rural Cooperatives

now in a position to attract new

investors and additional capital,” adds

Dalrymple, who is lieutenant governor

of North Dakota. 

Neither SDSP, USPB nor Golden

Oval plans to raise outside capital now,

but their new structures allow for the

possibility. Says Golden Oval’s Staley:

“Farmers make up less than 2 percent

of the population. We can’t continue

to go to farmers for equity in order to

grow or keep strong.” 

“It puts us in a position to protect

ourselves from difficult times when

prices might go down,” adds USPB’s

Hunt. 

Of the four co-ops examined above,

only USPB requires farmer control. At

USPB, owners of delivery rights hold a

majority of the seats on the board of

directors. “The premise of a producerowned entity remains intact,” says

Hunt.

Neither Golden Oval nor SDSP

requires farmer control. 

At Dakota Growers, the 10-member

board must include five North Dakota

residents and three agricultural producers. Currently, nine board members

farm, while an MVC representative

holds the tenth seat. 

“We’re still a farmer-owned business, just not a farmer co-op,” Dodd

says. 

Caution urged 

Many co-op advocates take a dim

view of co-op conversions, especially

those that don’t require a majority of

farmers to control the business.

The National Cooperative Business

Association (NCBA) in Washington,

D.C., opposes conversions even when

members retain control. 

“We think the co-op form of business remains the best model for producers and consumers,” says Paul

Hazen, NCBA president and CEO.

NCBA represents all types of co-ops,

including farmer, food, housing and

insurance co-ops as, well as credit

unions. “When any non-member has

ownership, that’s not a co-op.” 

James Baarda shares that view. “My

overall concern is when farmers start to

think of their own organization as an

investment,” says Baarda, an agricultural economist with the Cooperative

Services branch of USDA Rural

Development in Washington, D.C. 

In cases where the business has outside

investors, it is those investors who get

paid first, he notes. “Farmers get whatever’s left. That’s why farmers formed

co-ops in the first place [to ensure that

producers come first]!” 

Baarda says co-ops on both sides of

the “success spectrum” can wind up as

candidates for conversion. If the business is unsuccessful, leaders may be

desperately looking for some way to

save the business. If a co-op is successful, farmers may not be able to capture

the co-op’s value, and can seek another

business form that would allow them

to tap into the value. 

“Some successful co-ops, rather

than generating equity to farmers, put

their dollars into unallocated reserves,”

he says. “How does a farmer cash out

their value if they can’t get their hands

on it?” 

Hanson points to GoldKist Inc., the

nation’s largest integrated chicken

company, as an example of a traditional

co-op that converted so that members

could access enterprise value growth

and public market liquidity. After the

conversion, he says, the 2,300 former

farmer-members converted $360 million of patronage equities to stock, plus

added cash and stock of $140 million.

GoldKist issued publicly traded stock

as part of the conversion, and farmerheld stock will be publicly tradable as

well after a holding period. 

E.G. Nadeau expresses disappointment in co-op conversions, including all

the examples cited above. “But I understand some of the motivations,” says

Nadeau. “Some co-ops have converted

for the wrong reasons: based more on

financial benefits to management and

Leaving home? continued from page 11

Photo courtesy Humboldt Creamery 
Rural Cooperatives / January/February 2005 37

returns that were 35 percent higher, on

a per-pound basis, than in 2002. The

co-op’s average payment of $2,900 per

acre shattered the old record of $2,500

per acre, set in 1997. The co-op

reported near-record net sales of

$541.9 million

“This new revenue record is a

remarkable performance because the

2003 crop was the second largest crop

in the industry’s history and the second

billion-pound crop in a row,” Blue

Diamond President and CEO Doug

Youngdahl told owner-members at

their 94th annual meeting in Fresno,

Calif. “As a result, global consumption

reached new levels and industry shipments exceeded one billion pounds for

the first time in history — the fifth

consecutive year of record shipments,”

Youngdahl said.

“The days of looking at large crops

with trepidation are over,” added

Youngdahl. “Ever-larger crops will be

needed in the future to support global

consumption growth.” The co-op had

43 percent growth in retail brand sales

in 2003 and has achieved more than $9

million in annual savings since 2001

from new technology and process

enhancements.

Youngdahl said almond tree plantings are projected to exceed 50,000 net

new acres per year through 2010,

resulting in a dramatic increase in

almond supplies beginning in 2007

and 2008. Additional tonnage delivered to Blue Diamond will support

“new products markets and additional

consumption and will keep your businesses profitable” in years ahead, he

noted.

USDA awards $8.8 million

in rural broadband grants 

USDA has announced that $8.8

million in broadband community connect grants will be awarded to 16 communities in 10 states to connect essential community facilities in rural towns

and communities where no broadband

service exists. USDA believes that

technology is key to the ability of rural

businesses and rural economies to

compete in the global marketplace.

Extending broadband technology to

allow more families and communities

to access business, education, public

safety and heath services is part of the

Bush administration’s effort to expand

board members than on benefits to

members,” he says. He notes that some

former members of Minnesota Corn

Processors are suing the former manager, alleging that he “walked away with

more than $1 million as a result of his

support for the merger.” 

In its Nov. 7 issue, the Chicago

Tribune ran a detailed account of how

MCP’s then-CEO began secretly

meeting with its chief rival — Archer

Daniel Midland Co. — to lay the

groundwork for the sale of the co-op

to ADM, and that he agreed at these

meetings to try to convince farmers to

accept a lower price than most thought

the co-op was worth, while focusing on

how much he would receive from

ADM. “The case has fed long-standing

resentments among independentminded farmers against the consolidation of agriculture into the hands of a

few global titans, such as ADM,” the

article says. [Editor’s note: this was an

outright acquisition, not a co-op conversion, but many of the same issues

arise in each type of transaction.] 

Nadeau likes new co-op laws passed

in Minnesota and similar laws being

developed in other states that allow for

non-member investors but preserve

majority member control. These laws

apply to the formation of new cooperatives and do not affect existing co-ops.

They require that patrons retain at

least 50 percent of decision-making

power. 

“These laws retain the important

co-op provision of democratic member

control,” Nadeau says. “Attempts to

form co-op-like entities, such as Ccorporations or LLCs, don’t share this

basic statutory protection and thus can

more easily be converted to investorcontrolled businesses.” 

Not a black & white issue

Terry Barr, an agricultural economist with the National Council of

Farmer Cooperatives (NCFC) in

Washington, D.C., thinks critics

should avoid viewing co-op conversions as a black or white issue, considering the complex challenges facing

farmer co-ops. 

“NCFC supports all farmer-owned

organizations that seek to enhance

farmer returns,” says Barr. “We should

worry less about what we call the form,

and more about whether members

understand the implications of the

change and whether it truly serves the

interest of the farmers in both the

short and the long term.”

Other business forms continue to

change as well, he says. “The corporate business form arose in the early

1800s because of the lack of venture

capital,” he says. “Today, there is no

shortage [of venture capital], and

there’s an active equity market. At the

same time, the cost of regulatory burdens, spurred by corporate scandals

such as Enron, have increased dramatically. In this environment, many corporations are evaluating conversion.” 

Barr adds that most traditional ag

co-ops already modified their structures or capital plans to deal with a

changing global marketplace. “Many

farmer-owned co-ops are building relationships with companies throughout

the food chain,” he says. “Most are

involved in joint ventures. Most have

subsidiary LLCs. None are the same.” 

Barr agrees with co-op attorney

Hanson that the changing structure of

food and agriculture presents a transitional challenge for most co-ops.

“When co-ops were formed, the idea

was that current patrons would replace

the capital of prior patrons,” Hanson

says. “But co-ops have fewer patrons

today. Without outside capital, that

points to a train wreck in the future.” 

■ 
38 January/February 2005 / Rural Cooperatives

economic opportunity and improve the

quality of life in rural America. 

One grant was awarded to the

Havasupai Tribal Council to provide

wireless broadband internet service to

the community of Supai, Havasupai

Reservation in Arizona. Located in

the southwest corner of Grand Canyon

National Park, the Supai community

will connect all critical facilities,

including public safety and health service, public schools and homes in the

community that has a population of

503. Other grants range from the

North Slope Borough of Nuiqsut, Ala.,

to Benoit, Miss.

Communities selected

for the Broadband

Community Connect

program (the complete

list is available at

www.rurdev.usda.gov) do

not have access to broadband connectivity for the

essential services of

police and fire protection, hospitals,

local government, libraries and

schools. The program is in its third

year and, including today’s

announcement, has invested $30.1

million in grant funds. 

Ninety rural communities have 

now been connected to high-speed

telecommunications through this

program. In return, the communities will make at least 10 computers

available to the public with set

hours and instruction available for

use on the Internet. The grant program supplements USDA Rural

Development’s standard high-speed

telecommunications loan program. 

AMPI butter plant hit by fire

Cleanup was underway in early

January at the scene of a fire that damaged the Associated Milk Producers

Inc. (AMPI) butter manufacturing and

packaging plant in New Ulm, Minn.

Workers began clearing rubble from

the exterior of the manufacturing plant

as fire and insurance investigators continued their assessment. While the full

extent of the damage caused by the fire

was still being determined, the cooperative was working to provide uninterrupted service to its butter customers.

“Other butter makers from throughout

the country are generously helping

AMPI fill its orders,” said AMPI

General Manager Mark Furth.

Alert employees reported the fire

shortly after 6 p.m. on Dec. 1.

Following safety protocol, all 30

employees on duty in the plant were

immediately evacuated and no injuries

were reported. Fire officials commended AMPI employees for their quick

action and assistance in controlling the

blaze. “AMPI did an excellent job with

its evacuation

plan,” said

New Ulm

Fire Chief

Curt Curry. “Their participation in the

process was outstanding. There were

employees on the ground helping with

the plant layout and location of hazardous materials.”

Service to the dairy producers who

ship their milk to the plant was not

interrupted. The butter plant’s milk

receiving facility, which is housed in a

separate building, did not sustain any

damage. Milk delivered to the facility

is routinely processed at one of AMPI’s

12 other manufacturing plants that are

located throughout the upper Midwest.

The butter plant primarily churns

cream and packages butter.

CHS 2004 earnings a 

record $221 million 

CHS Inc. reported record net

income of $221.3 million for its fiscal

year ending Aug. 31, 2004. The record

net earnings represent the highest ever

recorded by a U.S. regional agricultural cooperative. The 2004 results compared with net income of $123.8 million for the period Sept. 1, 2002 - Aug.

31, 2003. Net income for 2004 exceeded a previous company record of

$178.6 million set in fiscal 2001. Net

sales for fiscal 2004 also set a record at

$10.9 billion, compared with $9.3 billion for fiscal 2003, largely attributed

to increased prices for

energy products and

grain. 

Strong refining margins, combined with

improved performance

by CHS lubricants and

propane, contributed to

the highest energy earnings in the co-op’s history. Agronomy operations, represented by

CHS 50 percent ownership in Agriliance, LLC,

reported earnings double

those of fiscal 2003.

CHS “outputs” businesses, consisting of

local operations, business

services, grain marketing, processing and

foods, reported

improved performance across the

board. Country Operations and

Services, which includes CHS local

operations, animal nutrition and sunflower businesses, turned in its fourth

consecutive year of strong performance. Grain marketing operations

overcame challenges in Chinese soybean markets to complete fiscal 2004

with its best earnings in five years.

Earnings for 2004 were up significantly over the previous year within

the processed grains and foods segment, which consists of oilseed proDebris is cleared following a fire at AMPI’s butter plant in New

Ulm, Minn. Above, Minnesota Governor Tim Pawlenty (left) and AMPI

General Manager Mark Furth survey the damaged plant, which will be

rebuilt in New Ulm this spring. Photos courtesy AMPI 
Rural Cooperatives / January/February 2005 39

cessing, Mexican foods, CHS ownership in Horizon Milling LLC (a flourmilling venture), and Ventura Foods

LLC (a vegetable oil-based food manufacturer and packager).

CHS has realigned its business

organization and leadership responsibilities to position the company for

growth in current and future businesses. Under the realignment, CHS will

consist of four operating divisions:

Processing, Ag Business, Energy and

Business Solutions. There will also be

two supporting divisions: Finance and

Shared Services. Each of the six divisions will be led by an executive vice

president. The changes took effect Jan.

1. “As CHS focuses on continuing to

add value for all of its stakeholders, it’s

essential that our structure reflects our

strategic direction and efforts to grow

in our core business areas,” said John

Johnson, president and chief executive

officer.

CHS also recently announced that

it is entering the wholesale propane

business in the Indiana, Ohio and

Michigan marketplace previously

served by Countrymark Co-op. 

Bison co-op optimistic about

emerging from Chapter 11

The North American Bison

Cooperative of New Rockford, N.D.,

filed for Chapter 11 (reorganization)

bankruptcy in Fargo, N.D., in

November, but says it is in better

shape than a year ago and expects to

emerge from bankruptcy within a year.

Meanwhile, the 330-member co-op is

fighting back with a new retail brand

name, TenderBison, and will be improving the efficiency of its processing

plant by doing custom bison slaughtering. The co-op currently handles 250

to 600 head a month at its plant, but

has the capacity to process more than

1,000 bison or cattle each month. 

Co-op CEO Dieter Pape said

$600,000 will be spent on capital

improvements this year, according to

AgWeek. “I think the changes we have

implemented will allow us to emerge

fairly quickly from Chapter 11 and

continue to be a profitable and ongoing

concern that has capacity to start

repaying members from profits to help

liquidate their deferred accounts, which

will be turned into equity,” Pape said. 

UW co-op reference 

book newly revised 

Cooperatives: Principles and Practices

in the Twenty-First Century, a cooperative reference book last published in

1980, has undergone an extensive revision by Kimberly Zeuli, assistant professor, and Bob Cropp, professor

emeritus, at the University of Wisconsin Department of Agricultural and

Applied Economics. The book’s chapters on organization, structure, financing and management of cooperatives

are as relevant today as ever. Books can

be ordered (there is a charge) at:

http://cecommerce.uwex.edu/

showcat.asp?id=107. A PDF version

can be downloaded for free at:

http://cecommerce.uwex.edu/pdfs/

A1457.PDF.

Specialty grain industry 

education network expands 

The Midwest Shippers’ Association

(MSA) co-op will be able to strengthen

its Midwest Specialty Grain Industry

and Education Network through a

grant from The Cooperative Foundation. “The Network provides valuable

education to producers on existing and

emerging opportunities in the identity-preserved specialty grains industry,”

says William J. Nelson, Cooperative

Foundation president. “It also provides producers with a network of

processors, traders, as well as domestic

and international buyers and end users

in the specialty grains industry.” 

As a networking project, the contribution will help support a promotional

DVD for the 2005 Midwest Specialty

Grains Conference and Trade Show.

The Network also includes weekly

news and information releases relating

to foreign trade leads and market intelligence. 

MSA is a nonprofit, agricultural

cooperative that helps producers, producer groups and small agribusinesses

in Minnesota, North Dakota, South

Dakota, Iowa and Wisconsin efficiently

produce and export specialty grains.

More information is available at:

www.mnshippers.org. As a private

foundation, The Cooperative Foundation has supported cooperative business development, education and

research projects in the Upper

Midwest for more than 50 years. 

For more information, visit:

www.coopfoundation.org. 

Cropp interim director

of UW Center for Co-ops

Bob Cropp, professor emeritus of

agricultural economics, will serve as

interim director of the Center for

Cooperatives at University of

Wisconsin-Madison. Cropp was

director of the center from 1990 to

2003. Anne Reynolds, who had been

serving as interim director, will

remain at the center as assistant director. The change relieves her of

administrative responsibilities so she

can focus on developing and delivering extension and outreach programs

and applied research. 

“The center has increasing demands

for work to address critical extension

and outreach needs,” said Dean Elton

Aberle. “I commend Anne Reynolds for

her leadership as interim director while

also carrying major responsibilities for

extension, outreach and grant projects.”

Founded in 1962 as the International

Cooperative Training Center, the

UWCC provides programs for international and domestic cooperatives.

DotCoop launches directory;

Paul Hazen to head OCDC 

A directory of all active .coop Web

sites is now available from DotCooperation LLC, the sponsor of the

cooperative-only .coop domain.

Launched in November, the directory

allows searches for co-ops by name,

location and domain name. The directory of nearly 4,300 addresses can be

found at www.directory.coop or

through a link from the dotCoop site at

www.coop. The directory displays each

domain name; clicking on the domain

name takes you directly to the site. 
40 January/February 2005 / Rural Cooperatives

“When you find co-ops on our

directory,” says NCBA CEO Paul

Hazen, “you know they are co-ops that

truly identify themselves as co-ops and

promote the co-operative principles

through their Internet identity.” The

.coop domain, approved by ICANN in

2000 and launched in early 2002, now

has more than 8,000 domain names

registered. 

In other NCBA-related news,

Hazen, who has served on the

Overseas Cooperative Development

Council (OCDC) board for six years,

has been elected chair by the board.

OCDC is an association of eight international cooperative development

organizations. As board chair, Hazen

said his top priorities will be to guide

OCDC through the transition expected with the retirement of long-time

Executive Director Ted Weihe and to

refocus on expanding funding for

OCDC members’ international development work.

“We need to reverse the trend

toward a declining federal commitment to overseas cooperative development and renew policy makers’ support for cooperatives as a tool to build

wealth and opportunity in some of the

world’s poorest countries,” Hazen said.

“I’ll be working to ensure that OCDC

resources are focused on that core

goal.” 

New funding source for 

rural economic development 

The U.S. Department of

Agriculture has announced the creation of a new rural development program that will provide a long-term

funding mechanism for loans and

grants to rural America. This new

source of capital for rural economic

development will bring new jobs to

some of the most isolated and rural

areas of the country. 

USDA Rural Development’s Rural

Economic Development Loan and

Grant Program (REDLG) manages

these projects. New regulations enable

USDA to guarantee up to $3 billion in

bonds or notes of nonprofit lenders,

for up to 20 years, if the proceeds are

used for electric and telecommunications loans. The lender, whose notes

the government will guarantee, will be

required to pay an annual fee of 30

basis points over the term of the

unpaid debt. Most of the 30 basis

points will be deposited into the

REDLG program.

The program was authorized by

Section 6101 of the 2002 Farm Bill.

Like other USDA Rural Development

programs, local leaders will make the

decisions on what projects are needed

in their communities. The REDLG

program provides zero-interest loans

and grants for all types of community

and economic development projects.

Past projects have included fire trucks,

libraries, health facilities and industrial

parks.

From the beginning of this program

in 1989, USDA Rural Development

has invested approximately $250 million in more than 1,000 projects across

the country, leveraging an additional

$1.4 billion in private sector funds and

creating an estimated 28,000 jobs.

During the Bush administration,

approximately $90 million has been

invested, creating or saving almost

15,000 jobs. 

Hanson gets co-op

leadership honor 

Mark J. Hanson, chairman of

Lindquist & Vennum PLLP’s

Agribusiness and Cooperative Practice

Group, received the Minnesota

Cooperative Leadership Award during

the joint annual meeting of the

Minnesota and Wisconsin state co-op

associations. Hanson is the youngest

recipient of the award and the only

attorney to be so honored. 

He is responsible for developing a

new form of business organization: a

cooperative taxed on a partnership

basis. His efforts in analyzing trends

related to the future viability of cooperatives led to Minnesota Chapter

308B, a 2003 law intended to help

spur significant Minnesota cooperative development. He is working with

similar legislation in Wisconsin and

Iowa as well as working with federal

officials to change federal law and

make the cooperative legal structure

more attractive. Hanson also organized some of the first ethanol, egg

and beef-processing cooperatives

using marketing agreement pledges

and stock investment for capitalizing these sophisticated businesses. 

The Leadership

Award is sponsored

and administered

by the Minnesota

Association of

Cooperatives to

honor distinguished individuals for

their contributions to cooperative

business. Nominees are selected for

their leadership, vision, personal commitment, innovation and statesmanship. 

Dakota local co-ops merge

The Farmers Union Co-op

Association of Redfield-Doland has

merged with the 4 Seasons Cooperative

of Britton, both in South Dakota, effective Feb. 1, 2005. The merger was

approved Dec. 6 at the 4 Seasons Coop’s annual meeting. Patrons of

Redfield-Doland voted unanimously on

Nov. 22 to merge with 4 Seasons, while

there were only two dissenting votes at

the later co-op, for a 98 percent favorable vote. The merged co-op will be

operated initially by a 16-member

board. Plans call for three directors to

go off the board each year at the first

two annual meetings, reducing the

board to nine directors.

4 Seasons Co-op’s year ending Aug.

31 was the second most profitable year

for the co-op since 1986. It had a margin before taxes of $837,695. The

grain division showed a profit of

$102,000. 

Lamb Checkoff faces vote

Sheep producers, feeders and firsthandlers are voting to decide whether

to continue the American Lamb

Checkoff program, which promotes

year-round consumption of American

lamb and works to minimize the

Mark J. Hanson
Rural Cooperatives / January/February 2005 41

volatility of seasonal lamb sales. The

four-week voting period begins Jan 31

and ends Feb. 28. The referendum is

being conducted at local county USDA

Farm Service Agency (FSA) offices. To

find your closest office, visit FSA’s Web

site: www.fsa.usda.gov/pas/default.asp. 

Collections under the Lamb

Checkoff program began in July 2002,

and raise a budget for the American

Lamb Board of about $2.3 million

annually. Administrative expenses are

limited to 10 percent of budget. The

13-member board is appointed by the

Secretary of Agriculture, and the board

office is in Denver. 

Record beet payments 

for Minn-Dak members

Minn-Dak Farmers

Cooperative harvested net

revenues of $198.9 million for

the excellent 2003 crop,

resulting in the highest gross

beet payment in co-op history

for member-shareholders.

Addressing members at the

co-op's annual meeting in

Fargo, N.D., in early

December, Minn-Dak

Executive Vice-President

Steve Caspers said sugar content of the 2003 crop was “an

excellent 18.7 percent -- well

above the five-year average,”

and beet purity was also good.

The co-op sliced 2.1 million tons of

beets, the second largest volume ever

processed by Minn-Dak. About 2.26

million tons of beets were harvested

from 112,800 acres in 2003, with an

average yield of 20 tons per acre.

The high-quality crop also resulted

in a good year for Minn-Dak’s marketing subsidiaries. John Doxie, president

of United Sugars Corporation, a joint

venture which markets sugar for

Minn-Dak and two other sugarbeet

co-ops, said sales volume was up 23

percent in 2004. Midwest AgriCommodities Co. of San Rafael, Calif.,

marketer of Minn-Dak’s molasses and

beet pulp, also had record sales volume

and made record returns to members.

Minn-Dak Yeast Co., owned by MinnDak and Sensient Technologies of

Milwaukee, Wis., recorded sales of

$7.3 million. 

Minn-Dak President and CEO

David Roche said he foresees challenges looming large on the horizon

for the co-op, including falling sugar

prices, the need for more industry promotion, higher production costs and

trade agreements which could result in

more sugar imports. Stagnant, if not

declining, prices have been the norm

at Minn-Dak the past several years,

and the co-op has continually taken

steps to increase productivity and efficiency to counteract the price declines

in order to cushion the impact on

shareholders, he noted. In addition,

the entire sugar industry has had to

come to terms with lower consumption

by consumers, which has prompted

sugar producers to consider new ways

to promote sugar. 

Despite these hurdles, Roche said he

sees a bright future for the co-op. “The

intensity of our owners has created a

‘can do’ culture at Minn-Dak,” he said.

Victor Krabbenhoft, delivering his

last speech before retiring as MinnDak board chairman, compared the

history of the co-op to a marathon.

“It’s a long run, complete with obstacles, and those with a strong will continue on. It’s important that we don’t

back down from these challenges, but

rather meet them head on.” 

The 2004 crop sugar content is

down to 16.7 percent, due to large

amounts of rain in the fall. 

USDA Ag Outlook Forum provides

insight on “front-burner” ag issues 

USDA’s annual Ag Outlook Forum

will be held Feb. 24-25 in the

Washington, D.C. suburb of

Arlington, Va. Leading commodity

analysts will be on hand to discuss

planting, trade and price prospects for

farm commodities for the year ahead.

The program will focus on the impact

of science on farming, farm policy and

agricultural markets. Speakers will

also discuss issues such as Mad Cow

disease (BSE) and beef trade,

prospects for energy prices

and ethanol, international

trade talks, market integration in North America, early

debate on the next Farm Bill

and new dietary guidelines. 

There will be ample time

for networking at this popular event, which attracted

1,400 people last year.

Attendees will receive a set of

new USDA long-term commodity projections to 2014.

The conference will be held

at Crystal Gateway Marriott

Hotel. For program details,

registration and hotel information, visit the conference

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

oce/forum, or call (877) 744-3083. 

Crop-based biofuels could add

$5 billion to farm profits by 2025

A new report provides further

weight to the potential benefit of

ethanol and other biofuels in reducing

America’s dependence on imported

oil, while adding $5 billion annually

to farm profits by 2025 if production

commitments are made now. “These

fuels are derived from cellulosic biomass such as corn stover, grain straw,

straw and sugarcane waste rather than

just from grains, thus providing a further benefit of harvesting two crops

from every field,” says Brent

Erickson, a vice president of the

Sugar samples are tested in Minn-Dak’s lab. Members received

the highest gross beet payments in the co-op’s history for the 2003

crop. Photo courtesy Minn-Dak
42 January/February 2005 / Rural Cooperatives

Biotechnology Industry Organization

(www.bio.org).

At $40 per dry ton, the $5 billion

added profit is based on 200 million

tons of biomass, which is less than

one-sixth the total amount of biomass

farmers could produce by 2050,

according to the report “Growing

Energy: How Biofuels Can Help End

America’s Oil Dependence,” issued by

the nonprofit National Resources

Defense Council (NRDC). The result

of a two-year study by agricultural,

engineering and environmental

experts, it is the first to focus on what

bioenergy technologies can do

when commercially mature

and operating on a large scale.

In addition to adding to farm

profits, biofuels have the

potential of being cheaper

than gasoline and diesel, saving about $20 billion per year

on fuel costs by 2050, according to the report. Moreover,

biofuels could reduce greenhouse gas emissions by 1.7 billion tons per year.

“This report also addresses

some of the concerns raised

when using biomass for energy

independence,” Erickson said.

“For example, biofuels can be

competitive with gasoline and

diesel, with a price of between

59 cents and 91 cents per gallon for the former and 86 cents per gallon for diesel. This is the equivalent of

saving $20 billion per year in fuel costs

by 2050. Enough land is available for

biofuels to make a big contribution,

and emission concerns over low-percentage blends of ethanol in the existing fleet can be addressed.”

For a copy of the 96-page report

and executive summary Growing

Energy: How Biofuels Can Help End

America’s Oil Dependence, log onto:

http://www.bio.org/ind/

GrowingEnergy.pdf 

USDA-EPA partnership

promotes renewable energy 

USDA Rural Development and the

Environmental Protection Agency

(EPA) recently announced a new interagency partnership to support agricultural and business based renewable

energy systems. This agreement is part

of the Bush administration’s effort to

increase teamwork in delivering services to rural America.

“This agreement is a triple play,”

said Agriculture Acting Under

Secretary for Rural Development

Gilbert Gonzalez. “It’s good for the

environment. It helps exploit a new

energy source — one with high growth

potential — of clean, renewable fuel to

reduce our oil imports. And it’s good

for the bottom-line of farmers, ranchers and small businesses.” 

The agreement provides for EPA

technical support of USDA in reviewing systems for methane gas recovery

via anaerobic digestion of animal

waste. EPA will also consult on technical guidelines for USDA Rural

Development initiatives encouraging

more state-of-the-art digester technologies. USDA and EPA are also

investigating expanding support to

other areas. The partnership will promote use of anaerobic digestion technology in a way that enhances rural

agricultural development, provides

environmental benefits and increases

farm revenues through the generation

of renewable energy. 

“Energy production is an exciting

growth sector for U.S. agriculture,”

said Gonzalez, “and a strong rural

economy, more jobs in rural areas,

renewable energy production and a

cleaner environment are all key elements of President Bush’s agenda.

USDA Rural Development is committed to aggressive leadership on these

initiatives.

The 2002 Farm Bill directs USDA

to encourage the development of

renewable energy. In 2003-04, USDA

Rural Development invested $16.9 million in 67 anaerobic digester projects.

With leveraging, the total

investment exceeds $80 million. These projects serve

11,300 rural households,

generate 127 GWh, and create 120 jobs.

Another $3 million going

back to Walton EMC

members

For the second year in a

row, most Walton Electric

Membership Corporation

customer-owners will be

taking part in a $3 million

refund. That means $22

million has been returned to

co-op members over the

past 17 years. Most of the

refunds will appear as a

credit on electric bills, with

the average being $27. This saves more

than $30,000 in check production and

mailing costs. Refunds are based on

the amount of the customer’s annual

power bills.

Some margins are held for reserve

funds so that Walton EMC is prepared

for emergencies. Margins are also used

to help pay down debt and to make

major purchases. “But when those

margin reserves grow to more than

what’s needed for a safe financial cushion, Walton EMC returns the extra,”

explains CEO Ronnie Lee. More than

92,000 customers will get money back.

Walton EMC is a customer-owned

electric company and serves 107,000

electric accounts in ten Northeast

Georgia counties. ■ 

USDA’s Gilbert Gonzalez (right) and the Environmental Protection

Agency’s Jeff Holmstead sign an agreement setting up a new partnership to support agricultural- and business-based renewable

energy systems. 
Rural Cooperatives / January/February 2005 43
44 January/February 2005 / Rural Cooperatives

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