2 January/February 2003 / Rural Cooperatives

The cover story of this issue

provides a summary of one of the

most important USDA co-op

reports of recent years: “Agricultural Cooperatives in the 21st Century” (RBS Cooperative Information Report 60.) The article (and

report on which it is based) presents an overview of what many of

the nation’s leading cooperative

thinkers believe to be the critical

challenges cooperatives must come

to grips with if they are to remain

viable in the years ahead. 

This report reflects the thoughts of

79 cooperative executives, board members, university professors and staff,

farm organization leaders, cooperative

council members and cooperative advisors, each of whom devoted a day of

their time to participate in one of six

focus group meetings held across the

nation. Their commitment exemplifies

the importance they all attached to this

exercise, knowing that the margin of

error becomes ever thinner in agriculture. For those who do not have a good

overview of the road ahead, the odds

are slim for a successful journey. 

The result of these six days of

intensive discussions is a compendium

of the views and ideas—the collective

wisdom—of these leaders on the role

of cooperatives at the dawn of the

21st century. We at USDA again

express our thanks to these 79 leaders

and thinkers, whose cooperation represents the type of support USDA has

relied on from the co-op community

in the 78 years since Congress first

mandated that USDA play a key role

in increasing public understanding

and use of the cooperative form of

business. 

Does Congress’ encouragement for

collective problem solving through cooperatives still have relevance in the 21st

century? The answer, from our focus

group members, was an emphatic

“Yes!” In fact, they see such action as

even more imperative today, given

disparities in market power between

vulnerable independent producers

and the increasing level of concentrated economic power in the food

manufacturing/retailing sector and

farm input suppliers. 

The focus group participants saw

governance, capitalization, member

relations and benefit-sharing issues

as becoming increasingly complex and

difficult. But there are rational solutions. Panelists recommended more

analysis of these issues by USDA/RBS

Cooperative Services through its

research, technical assistance and education programs. 

Work of this nature by USDA can

only continue with support of, and

interaction with, the cooperative community. It is your cooperatives that

supply the vital economic data

(through our annual survey) and provide other information on strategies

and business operations, etc., that are

so essential to our efforts. 

Improvements in the legal framework for cooperation and the building

of effective working relationships

among cooperatives to strengthen

members’ purchasing and marketing

power are possible through close interaction between cooperatives and the

public sector program that serves them. 

Cooperative and farm community

leaders, as well as university faculty,

devoted valuable time and effort to

observe, comment and recommend.

Now it is our collective task to respond.

Randall Torgerson, Deputy Administrator

USDA Rural Business-Cooperative Service

COMMENTARY

Assessing the risks and opportunities ahead

For those who do not

have a good overview

of the road ahead, the

odds are slim for a

successful journey.

Randall Torgerson, deputy administrator for USDA/RBS Cooperative Services

has announced his retirement, effective Jan. 10, 2003, ending his career of 29

years at USDA, including 27 years as the leader of USDA’s cooperative program.

Torgerson, a native of Wisconsin, left a position as ag economics professor at

the University of Missouri-Columbia in 1974 to become a staff economist to the

administrator of USDA’s Agricultural Marketing Service. In 1975, Agriculture

Secretary Earl Butz appointed him as administrator of the Agricultural Cooperative Service. Torgerson plans to continue to reside in Fairfax County, Va., and to

remain active in promoting cooperatives, his lifelong vocation and passion. ■

USDA co-op program leader Torgerson to retire 
Rural Cooperatives / January/February 2003 3

Rural COOPERATIVES (1088-8845) is published

bimonthly by Rural Business–Cooperative Service,

U.S. Department of Agriculture, 1400 Independence

Ave. SW, Stop 0705, Washington, DC. 20250-0705.

The Secretary of Agriculture has determined that

publication of this periodical is necessary in the

transaction of public business required by law of 

the Department. Periodicals postage paid at

Washington, DC. and additional mailing offices.

Copies may be obtained from the Superintendent of

Documents, Government Printing Office, Washington,

DC, 20402, at $21 per year. Postmaster: send address

change to: Rural Cooperatives, USDA/RBS, Stop

3255, Wash., DC 20250-3255.

Mention in Rural COOPERATIVES of company and

brand names does not signify endorsement over

other companies’ products and services.

Unless otherwise stated, contents of this publication

are not copyrighted and may be reprinted freely. For

noncopyrighted articles, mention of source will be

appreciated but is not required.

The United States Department of Agriculture (USDA)

prohibits discrimination in all its programs and 

activities on the basis of race, color, national origin,

sex, religion, age, disability, political beliefs, sexual

orientation, and marital or family status. (Not all 

prohibited bases apply to all programs). Persons 

with disabilities who require alternative means for

communication of program information (braille, large

print, audiotape, etc.) should contact USDA’s TARGET

Center at (202) 720-2600 (voice and TDD).

To file a complaint of discrimination, write USDA,

Director, Office of Civil Rights, Room 326-W, Whitten

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.

Ann Veneman, Secretary of Agriculture

Thomas C. Dorr, Under Secretary, USDA Rural

Development

John Rosso, Administrator, Rural BusinessCooperative Service

Randall Torgerson, 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.

United States Department of Agriculture

Rural COOPERA . TIVES

January/February 2003 Volume 70 Number 1

On the Cover:

On the cover – What will it take for co-ops to compete successfully in the

21st century? The ideas of 79 co-op leaders are summarized, beginning on

page 4. USDA graphic by Steve Thompson

FEATURES

4 Meeting the challenge: co-ops in the 21st century

By John Dunn, Anthony Crooks, Donald Frederick, Tracey Kennedy, James Wadsworth

7 Negotiating the crossroads of a new century

By Randall E. Torgerson

10 Annual Reports:

How to read them and what they should tell you about your co-op

By David Chesnick

15 What went wrong at Agway?

Cornell professors describe how co-op’s chickens came home to roost

By Elizabeth Doran

16 Frogs, snakes & kilowatts

East Kentucky Power Co-op finds green in environmental program

By Steve Thompson

20 Large co-ops see growth in ‘01, reverse declining

net margins

By David Chesnick

26 Oneida grocery co-op boosts community; helps

keep more money on reservation

By Patrick Duffey

31 Local co-ops’ net income and sales climb in 2001

By Beverly L. Rotan

DEPARTMENTS

2 COMMENTARY

25 FOCUS ON

34 NEWSLINE
By John Dunn, Anthony Crooks, 

Donald Frederick, Tracey Kennedy, 

James Wadsworth

Editor's Note: The authors are all staff members of

USDA/RBS Cooperative Services. This article is a summary of

recently published RBS Cooperative Information Report 60,

"Agricultural Cooperatives in the 21st Century." It is 

available on-line at the RBS publications Web site:

http://www.rurdev.usda.gov/rbs/pub/newpub.htm. To receive a

free hard copy of the report, send an e-mail request, including

your mailing address, to: dan.campbell@usda.gov, or fax

requests to (202) 690-4083.

he start of the 21st century is a time of change

and challenge for agricultural cooperatives. In

late 2001, USDA/RBS Cooperative Services

(CS) staff conducted six workshops around

the country that examined what cooperatives

must do to survive and thrive in the years ahead. Each session consisted of a moderator and 10-15 cooperative managers, directors and advisers. They spent a full day discussing external and internal issues and forces confronting

cooperatives and priorities for shaping future cooperatives.

After the last workshop, USDA co-op specialists combined the ideas expressed by the participants with independent research findings by its staff and others into a comprehensive report, “Agricultural Cooperatives in the 21st

Century.” This article summarizes the observations and

recommendations in that report.

External issues

The world in which cooperatives operate, both on the

farm and in the marketplace, is changing at a rapid pace. To

remain viable in the 21st century, cooperatives must recognize and adjust to meet the challenges created by the changing marketplace. These include:

Changing farm demographics. Fifty years ago,

America’s farms were predominately operated by traditional family farmers who relied on farming for their

income and farmed with the assistance of family members, but little or no hired help. Today, large “commercial” farms that comprise only 8 percent of the farm population generate 68 percent of all farm production.

At the other end of the spectrum, part-time farmers

account for 62 percent of the farm population, but generate

only 8 percent of farm production. Much of the cooperative

system was built to support traditional family farmers. Cooperatives must adapt to a diverse membership that requires

different services, products and structures.

Technological innovation. Various technology developments are impacting every operation of farmer cooperatives,

including:

1. Transportation. Large trucks and wide, smooth roads are

making obsolete local grain elevators and farm supply stores

built to serve farmers who hauled their production to market

and their supplies back home in horse-drawn wagons and

early pick-up trucks.

2. Information. Computers make possible ever-faster collection, analysis and dissemination of information among

potential buyers and sellers of agricultural production and

food products, shortening the time period in which purchase,

inventory and pricing decisions are made. Cooperatives must

evaluate their role in a marketplace that values nimbleness,

flexibility and information over stationary structures and

physical inventory.

3. Biotechnology. Biologically based innovations are providing exciting new products, such as ethanol and bio-diesel,

bio-polymers and plant-based pharmaceuticals. Historically,

improved plant varieties have been developed by land-grant

universities and made available to the public at large. Now,

4 January/February 2003 / Rural Cooperatives

T

Meeting the challenge:

Co-ops in the 21st century
Rural Cooperatives / January/February 2003 5

investor-owned firms and universities with large research and

development budgets form alliances to patent and profit from

their discoveries. Producers and cooperatives are struggling

to find a role in this growth area.

Consolidation and Industrialization. Consolidation

among firms at the processing, wholesale and retail levels of

the U.S. food marketing system continues unabated. Dominant retail firms, led by Wal-Mart, are implementing supplychain management techniques that place increasing burdens

on suppliers to provide quality product at the lowest possible

price, when and where the buyer wants it. Large food processors, following the lead of

poultry marketers, are integrating their operations and

dictating how farmers will

grow their crops and livestock. As a consequence, even

the largest cooperatives are

finding it difficult to exert

market influence and bargaining strength.

Globalization. Communication and transportation

developments are leading

toward a truly world market

for agricultural supplies and

products. Farmers and cooperatives must learn to do business in an environment where

they compete and do business with not only the firms down

the street, but also the ones on the other side of the globe.

Consumerism. Technological breakthroughs, notably

bar coding, are making it easier to identify and track consumer preferences and increasing consumer influence over

food marketing. The future of commodity-oriented cooperatives, whose members tend to produce whatever they

want and expect their cooperative to sell it for top dollar,

may be limited. To be viable in the future, cooperatives

must offer products consumers want and that can be sold

for more than the cost of producing and marketing them.

Internal Issues

As cooperatives strive to meet the challenges of an evolving business climate, they must also deal with issues within

their own organization and operation.

Acquiring equity. Cooperative principles limit the opportunity and appeal for non-members to provide equity to

cooperatives. Farmers are often either unable or unwilling to

adequately capitalize their cooperatives. This saddles cooperatives with weak balance sheets and makes it difficult for

them to provide basic services, let alone fund efforts to take

advantage of new business opportunities.

Diverging memberships. Cooperative memberships

reflect the growing disparity among producers. Commercial

farmers frequently want different things from their cooperative than do part-time or retired producers. New business

strategies may be necessary to satisfy the desires of a heterogeneous membership.

Board effectiveness. User control is often implemented

by a board of directors composed entirely of producer-members. Many of these directors lack the training and experiences to analyze options for dealing with 21st century issues

such as supply chains, technological innovations, complex

business arrangements and globalization.

Federated model. The federated structure, in which

producers form local cooperatives that, in turn, form large

regional cooperatives to acquire supplies and market products, is under severe pressure. Many local grain marketing

and farm supply cooperatives are not consistently profitable. They expect their regional federated cooperative(s)

to be the low-cost source of farm supplies, pay a premium

for product delivered for sale and issue a hefty cash patronage refund each year.

Locals are sometimes viewed as unresponsive to the need

for change—especially when it comes to closing surplus,

unprofitable facilities and to investing in new business opportunities likely to be profitable in the 21st century. Some

No definition of a “cooperative” is universally

accepted to the exclusion of others. But three basic

principles capture the essence of a cooperative enterprise. They are:

• User-ownership. Users provide the equity investment in a cooperative and have an ownership claim

on its assets.

• User-control. Users elect directors and democratically decide other key issues for their cooperative.

• User-benefits. Users receive both the services provided and a share of the earnings on the basis of how

much business they conduct with the cooperative.

Other businesses are owned and controlled by

investors who focus on maximizing profits. Cooperatives

aim to provide quality goods and services to their members at the lowest possible cost, consistent with generating sufficient earnings to keep the business viable.

These principles provide some business advantages

and justify favorable public policy initiatives. But they

also make it difficult for cooperatives to meet certain

business challenges, and this is leading some persons

to advocate placing less emphasis on them. ■

Role of cooperative principles
6 January/February 2003 / Rural Cooperatives

doubt exists as to whether a system with multiple layers of

profit and decision-making centers can take the swift, decisive actions required to succeed in the years ahead.

Recommendations

Two themes permeate strategies for cooperatives to succeed in

the 21st century. First, greater investment is needed in the people

who make up cooperatives. Members, directors, managers and

advisers must have the skills required to deal with 21st century

issues. Otherwise, they will neither completely understand the options available

nor have the ability to analyze them and

make sound business decisions.

Second, an emphasis must be

placed on pragmatism and profitability. Cooperatives are businesses.

In the years ahead, they should focus

on solving business problems and providing value to their members. If they

don’t, members will stop patronizing

them and they will just fade away.

1. Accept and embrace change.

Wishing markets had stopped changing at a certain time, or managing a

cooperative as if they had, is a sure

prescription for disaster. Industrialization, globalization and technological

innovation are here to stay. They are

continuously evolving and presenting

new and different challenges and opportunities. And as cooperatives move through the 21st century, other developments

will have an equal or greater impact. Cooperatives must

accept and embrace change.

The recommendations that follow will not be implemented if this one is ignored. Cooperative leaders who refuse to

accept change can be expected to take the easy way out when

confronted by it: do nothing and hope for the best. Directors, managers and advisers must reject this approach and

implement strategic planning programs that systematically

look at yesterday, today and tomorrow. We should view

“where we have been and where we should be” not as ends in

themselves, but rather as foundations for building cooperatives that thrive in the years ahead.

2. Strengthen cooperative leadership. Cooperatives

need leaders who are prepared to meet the challenges of the

21st century.

Cooperatives must broaden the skills and experiences of

their directors. The selection of farmer-directors should be

based on ability, not popularity. Directors, once elected,

shouldn’t automatically serve for life. Longevity can be a criteria for director selection, but it should not be the only criteria. Cooperatives should consider adding outside directors

to their boards, especially people with skills in areas where

many farmer-directors lack experience, such as food marketing and corporate finance. Grower control is maintained by

giving the members the power to remove outside directors

who fail to meet their approval.

Managers must be able to work effectively in a cooperative

setting. They may not have the impact on director selection

they would in an investor-owned firm (IOF). And as the owners are the users, cooperative managers must accept shareholders walking into their office with often critical comments,

while in an IOF, the shareholders may not even know where

the headquarters is located. When selecting top management,

prior cooperative experience should be

an important criteria.

3. Maintain a solid equity base.

Cooperatives must give producers reasons to invest their scarce financial

resources. Providing quality goods and

services at reasonable prices is part of

the answer.

Some farmers are using new and creative financing strategies compatible

with cooperative principles. The newgeneration model cooperative gives

farmer-owners the option to sell their

equity to other producers at a market

price. This complies with the userowner, user-control or user-benefit

tenets. In other instances, outsiders

may purchase dividend-bearing but

non-voting preferred stock. While this

is a modest departure from strict userownership and user-benefit, it protects the key principle of

user-control.

If cooperatives are to be adequately capitalized in the years

ahead, either members will need to provide additional funding or cooperatives will have to turn to other sources. The

pertinent questions then become, how much capital can

farmers provide without jeopardizing their own financial

health and how much can cooperatives accept from outsiders

without jeopardizing their cooperative character?

4. Emphasize education. Cooperative education is an

investment and should be viewed as such by both cooperative

and public decision makers. While the importance of cooperative education has not diminished over the past few decades,

the resources devoted to it have been severely curtailed.

Director training is the No. 1 priority. Without the proper

training, the pressure will mount on farmer-directors to abdicate their role as stewards of their members’ assets to outsiders with the expertise to run the business but not the

appreciation for the importance of the member-user that

makes a cooperative special.

Cooperative education is urgently needed for other

audiences as well: employees, members, youth, young

farmers and the general public. Cooperative leaders have

allowed, even facilitated, an across-the-board erosion in

cooperative education. In the long run, this can be as

continued on page 36

Tommy Engelke, executive vice president of

the Texas Agricultural Cooperatives Council,

makes a point during a focus group meeting in

Washington, D.C. USDA photo by Dan Campbell 
By Randall E. Torgerson,

Deputy Administrator

Rural Business-Cooperative

Service, USDA

Editor’s Note: The following is excerpted

from a speech Torgerson gave at the 57th

annual meeting of Tennessee Farmers Cooperative, Nashville, Tenn., in December. 

he general economy and

the agricultural sector

have been experiencing

some of the most trying

economic times in our

nation’s history. The bursting of the

technology stock bubble resulted in the

longest sustained bear market of recent

times. The Sept. 11 terrorist attacks on

the Pentagon and World Trade Center

and the corporate accounting scandals

that have rocked Wall Street have also

had a negative impact on the economy

and (in the latter case) caused a loss of

consumer confidence.

On the farm front, commodity prices

in many sectors remain low due to

global oversupplies and a more free

flow of goods across borders, resulting

in a severe cost/price squeeze that is

causing many farmers to struggle and to

dip into their equity reserves. These

have affected farmers’ purchasing habits

for farm supplies, causing harsh times

for input suppliers. In the middle of this

year, Congress passed the Farm Security and Rural Investment Act of 2002,

pumping substantial direct government

payments into the farm economy.

While management of accounts

receivable has received increased attention, the high incidence of bad debts

has made collections difficult. Interest

rates, a bright spot, have been lowered

to help stimulate the economy and

remain at the lowest levels in many

years, but returns on savings are likewise reduced. Strong real estate prices

and recent tax cuts are also credited by

some for helping to deflect some of the

pain of the bear market. 

Our RBS Cooperative Services unit

in USDA Rural Development recently

reported that net business volume for

the nation’s 3,229 farmer-owned marketing, farm supply and related service

cooperatives topped $103 billion in

2001. Net income climbed to $1.36 billion, up over 6 percent from 2000. Farm

supply cooperatives saw net income

increase by nearly 38 percent, driven by

higher margins on petroleum sales. 

Farm production supply sales

climbed 2.8 percent, with fertilizer and

petroleum sales up by over 8 percent,

and seed sales up by over 14 percent.

Sales of crop protectants, feed and other farm supplies were all down. On the

marketing side, livestock, poultry and

milk notched the biggest sales gains in

2001, while sales in almost all other

agricultural commodities fell. Combined assets of farmer-owned cooperatives reached $48.5 billion in 2001 and

net worth was just over $20 billion.

With such positive news on the

cooperative front generally, why do

some express serious concerns about

the health of farmer cooperatives? 

While cooperatives collectively

demonstrated improvement over results

in 2000, a number of regionals had low

or negative earnings. In particular, the

recent Chapter 11 bankruptcy declarations by Farmland Industries, the

nation’s largest cooperative, and Agway,

a large Northeast regional, have raised

eyebrows in the farm community and

caused a few skeptics to suggest that

cooperatives are an outdated business

model. The trade and agricultural press

have recently published articles adding

to this debate. Headlines I’ve seen in

Northeast and Upper Midwest newspapers include: “Co-ops at a crossroads,”

“Co-ops challenged” and “Brutal year

keeps getting worse for cooperatives.”

Obviously, what affects farmers

influences the performance of their offfarm businesses: their cooperatives. But

all news has not been bad. Poor performance by a few does not indict the

cooperative model of doing business,

nor does it negate in any way, shape, or

form the necessity for farmers to work

together for their own economic good.

Farmers generally continue to have

untapped equity in the rising value of

their farms that can be leveraged for

productive investments in off-farm,

value-added or other endeavors to

enhance their farm-related incomes.

The challenge for members, directors and management is to constantly

assess the economic environment in

which cooperatives are operating and

to make the necessary adjustments to

keep their cooperative system on the

cutting edge to meet members’ needs

in the most efficient and effective ways

possible. This is a tall order given

changes occurring in the makeup of

production agriculture, farm programs

and among the customers and competitors that cooperatives face. But this is

the real world in which we live today.

Learning from the experiences of

others can help guide your organization. It is a good time to seriously

Rural Cooperatives / January/February 2003 7

T

Negotiating the crossroads 

of a new century
reflect on some of these basic lessons

learned.

Maintain a strong balance sheet

Cooperatives that have found themselves in trouble have often relied too

heavily on debt financing. The highly

leveraged position has left them

exposed during inevitable industry

down cycles and unable to withstand

prolonged periods of stress, such as we

are now experiencing. And too much

money that could otherwise be

returned to farmers is going into

lenders’ pockets. Members of cooperatives at all levels—local and regional—

need to remind themselves that it is

their responsibility to properly capitalize their cooperative businesses. 

Don’t be afraid to remind members

of this responsibility and to ask them

for further capital contributions to support their cooperative business. This is

especially true when entering new business lines, such as value-added marketing. Members benefitting from such

new activity should be encouraged to

make capital contributions proportionate to the newly undertaken business

activity in which they are participating. 

It is difficult for any business to

extend itself beyond the carrying

capacity of its equity base. When that

happens and losses occur, owners

stand the risk of credit institutions

effectively displacing their governance

role and becoming managers of the

company store. 

Reduce system costs

There is a natural tendency in federated cooperative systems to resist

change. A recently completed report by

our agency, Cooperatives in the 21st Century (see page 4), discusses the heavy

pressure on federated cooperatives. The

main reason for this is that while farm

populations have shrunk, we still have

plants and facilities that exceed the

needs of the customer base. This translates into maintenance of higher costs

within the cooperative system compared to competitors. These costs are

seen in redundant assets, under-performing plants and stores, repetitive

handling and transportation of products, and layers of profit centers within

the federated system that may be outdated in today’s market. 

Boards of directors are asked to

address these cost issues and to rationalize their local operations by making

sure—among other things — that they

remain capable of serving the 20 percent of patrons who are doing 80 percent of the business. If they don’t, cost

structure will remain high as business

drops off and members’ equity in their

cooperative will erode. This situation is

happening in too many instances across

the country.

The “All things to all people” trap 

Each business has its core competencies and knows them. Concentrating on delivering those products and

services to members profitably and cost

effectively is key to continuing success.

Constant assessment of member needs

and the actions of competitors is essential to being a survivor in today’s business world. Diversifying into business

activity unrelated to members’ needs or

outside the expertise of management

can spread the cooperative too thin and

run the risk of weakened management

controls that lead to losses. It can also

lead to membership questions about

whom the cooperative is really benefitting, which affects member loyalty.

Attempts to emulate the scope of activities of multi-national competitors—

or, for example, to “out Cargill,

Cargill”—will put members’ equity at

risk, and the cooperative as well. That

is what led to the demise of one of the

largest regional cooperatives.

Dealing in a mature industry

Co-ops must realize that all links in

the food system are operating on thin

margins in a mature industry. Farmers

are fewer and larger. Despite growth in

farm size and an increase in the number

of smaller hobby farms, the total

acreage in farming has declined as urban

sprawl claims farmland. All marketchannel participants faced with this

dilemma seek to serve a shrinking market. Often the means of growing market

share is by gobbling up a competitor.

To deal with this situation and stay

viable, many cooperatives have extended their base of operations through

merger, acquisitions and partnering

with other cooperatives. This spreads

overhead costs from operations over a

broader base while delivering products

and services to members more cost

effectively. Inefficient or poorly located facilities are closed, sometimes

reluctantly, by a board of directors.

Much merger activity continues

among locally owned cooperatives

throughout the country as a strategy to

deal with this situation. 

Further, a major realignment

of feed, fertilizer and petroleum

delivery has occurred through joint

arrangements among regional

cooperatives. Thorough due

diligence is required as part

of the prenuptial process

so that unforeseen

skeletons in closets

are discovered

before, not

after, combinations are executed. In some cases,

cooperatives have taken

on partners in totally unrelated lines of business and

found these to be not compatible

in the long run. 

When mergers take place

or other businesses are

acquired, it is necessary to

take steps to fully integrate

this expanded business activity into the core activities of

the business and operate

them on a cooperative basis.

Letting these remain outside

and “run loosely” often leads

to a holding company style of management that can prove ill-adapted to

cooperatives. Cooperatives may require

more management oversight than other kinds of businesses at all levels to

maintain the focus on cooperative

objectives. Otherwise, economies of

size and scope are not captured from

loose confederations that lack effective

management controls. Similarly, com8 January/February 2003 / Rural Cooperatives

USDA graphic by Steve Thompson
plexity of the business arrangements

can increase to such an extent that,

quoting a Dutch source, members have

a difficult time “finding themselves in

their own organization.”

Growth through acquisitions is

common in mature industries and has

been practiced by a number of cooperatives, particularly by the largest 100

firms in the food industry. Indeed,

there has been a feeding frenzy on

small- and medium-sized competitors

by the largest 10 food firms. Acquisitions, including those by cooperatives,

provide opportunities to expand operations territory, acquire brands and, in

some cases, open up a new customer

base or new line of business. When

negotiating terms of acquisition — as

with mergers—thorough attention

to due diligence is required. It is

also necessary to carefully

weigh the price and payback from such transactions. A number of

troubled regional cooperatives

have paid too

much for businesses acquired.

Some cooperatives

have also chosen to partner

with investor-owned firms

through joint ventures to further

accessing markets and making prudent

use of capital expenditures. Searching

for, and identifying, the right

partner involves meeting

mutual needs and meeting

those needs using win/win

strategies. Cooperatives are

encouraged to have at least

co-equal shares of ownership

and control in these ventures.

Also, having a predetermined

exit strategy is an important component

of entering into joint ventures with outside firms, since many of these arrangements tend to be relatively short lived.

Work to keep co-op

system viable, strong

Farmers in the United States have one

of the best farm supply-delivery systems

found anywhere in the world. It didn’t

develop by accident, but rather through

farm leadership and management that

correctly perceived the need for developing channels of supplies, services and

marketing to remote rural communities.

Like all business sectors, farm supply distribution is affected by new technology, such as use of the Internet system as a source of information on

prices and other terms of trade. It is

also affected by discount chains, such as

Home Depot, Lowes and Wal-Mart,

that sell supplies in bulk quantities.

How this technology and new competition are dealt with requires astute management and boards of directors sensitive to changing buying habits. 

Some faltering cooperatives have

circumvented their own stores and the

local cooperative system by instead

relying on dealer networks. While

farmers need to assess how much local

cooperatives must invest in assets, relying solely on a dealer system of delivery

often puts the regional cooperative a

step further removed from memberpatrons. And dealers are often fickle in

their loyalty to the supply sources, opting to move their business for a nickel.

Keep up with farming trends 

A key requirement in today’s farm

supply business is to keep an eye on

farming trends. The mid-South region

has seen major crop shifts occur as

tobacco production has decreased and

dairying has diminished. In some states

in this region, there are more horses

today than there are dairy cows. While

the loss of dairies is a blow to many coops, the horse industry provides a feed

marketing opportunity that could help

offset at least some of that loss. 

Fertilizer sales continue to be affected by environmental concerns as phosphate levels build up on farms in many

states. Crop protectant sales have been

revolutionized by the use of Roundup,

which changed the whole margin structure in chemical sales. Cotton production grew like gangbusters in the 1990s

in the Atlantic states, but has since flattened out. In a number of areas, minor

crop production has increasingly provided new business opportunities.

While Internet sales have not yet

turned out to be all that was projected,

farmers like to price-shop. Providing

information can be very valuable to

farmers. A very informative Web page

will get farmers interested in your

cooperative, allowing farmers to visit it

afterhours. It also helps locals provide

information on services they offer,

products and hours of operation.

Global information systems and

global positioning system (GIS/GPS)

are very important words to farmers.

Even if they cannot afford it now, they

still want to know that your cooperative is on the forefront of technology.

Locals need encouragement to acquire

this equipment and, in some instances,

to share it when demand is not great

enough to support an individual purchase.

Use of crop and livestock production specialists through regional supported programs keeps local employees

informed of new products and technologies. Certification of the program

and increased use of quality protocols

for identity-produced crops shows

farmers that there are top-notch

employees available to help them

understand new technologies. Similarly, employment of marketing specialists

to help advise farmers on marketing

their output can greatly increase farmer

loyalty as well as input sales.

Cooperatives must stay attuned to

these trends and strategies to take

advantage of opportunities where

feasible.

Are cooperatives at a crossroads? In

many ways, yes, given the challenging

environment and instances of demise.

But as shown by the statistics mentioned

earlier, cooperatives remain a strong and

significant force in today’s marketplace.

There are both pluses and minuses for

co- ops in what I have said here today.

Either way, members and directors need

to stay fully attuned if they want to

properly position their cooperatives for

the times ahead. Here are six lessons to

keep in mind as we look forward to

good years ahead and a continuing

strong market presence:

Rural Cooperatives / January/February 2003 9

continued on page 37
By David Chesnick

USDA/RBS Economist

david.chesnick@usda.gov

nnual reports present information about a cooperative at one point

in time. By the time the auditors finish with their work and the

report is published, the information is already history. However,

they do provide a useful source of information about your cooperative.

While it illustrates the cooperative’s performance for the year, to be truly

valuable the annual report must have comparative

data. The comparison can be with similar businesses

or the same cooperative over a period

of time. It is also important to

keep a calculator, pencil and paper

handy for analyzing the numbers.

While there is no single correct way to

read an annual report, there are some sections that should be read first. Good annual

reports usually contain six parts. However, not

all annual reports will contain all items. Some

include only a consolidated balance sheet and

statement of operations. Others will include all six

parts, along with non-financial information, such as

overviews of operations and new facilities, marketing

efforts and articles focusing on certain members. 

The annual report generally flows in the following order:

10 January/February 2003 / Rural Cooperatives

Annual reports:

How to read them and what they

should tell you about your co-op

A
1. CEO and/or board chairman’s report

2. Management’s discussion and analysis of financial

results 

3. Multi-year summary of selected financial data

4. Auditor’s report

5. Financial statements

6. Footnotes

Auditor’s report

A good place to start reading the annual report is the auditor’s report. This is a statement from the independent auditor

letting you know if the figures in the financial statements represent accurately the position of the cooperative and if they conform to the generally accepted accounting principles. 

The report can be either non-qualified or qualified. A

non-qualified report means the auditors believe the financial reports are free of material misstatements. If the

report is qualified, the auditor will usually spell out what

its concerns are in relation to the numbers that are

reported. 

CEO/Chairman’s report

Next, examine the CEO/chairman’s report. This report

is usually a summary letter that will outline the co-op’s performance of the past year and provide some indications of

the plans for the cooperative’s future direction. The letter

should be clear, precise and honest about the ups and

downs for the past year. It should also briefly describe

major plans for the next year. 

A good idea is to compare last year’s letter

with this year’s. Compare what the CEO

delivered against what was promised

during the previous year or two. If the

CEO was fairly accurate last year, there is

a good chance that he or she is on top of

the situation concerning the cooperative’s

business. If the trend is to consistently overpromise and/or under-perform, then it might

indicate that the CEO or president isn’t being

totally honest with members or doesn’t have a

complete handle on the cooperative’s situation

or its operating environment. 

Management discussion and 

analysis of financial results 

While the CEO/chairman’s report provides a summary of operations, the management’s discussion and

analysis should support that summary while filling in

the details of operations. This section also tends to be

written in more cautionary style than the CEO/chairman’s report and should be read in conjunction with it.

This will usually look at what significant changes occurred

during the past year. 

This section should focus on each segment of the cooperRural Cooperatives / January/February 2003 11

Clockwise from top: Sunkist

used a statement from its

president/CEO on the cover of

a recent annual report, while

DFA showed a group of members seen through a die-cut

window. When folded open,

the DFA report shows a drop

of milk creating concentric

rings and continues the message from the cover with the

words “...can affect our entire

organization.” In the text portion of its report, Diamond of

California used well-known

chef Martin Yan to demonstrate the joys of cooking with

walnuts. 
12 January/February 2003 / Rural Cooperatives

ative’s business, including

operations and financial position. It may also include an

analysis of the market and

competition. 

Multi-year summary of 

selected financial data

It is unusual for a cooperative to find sudden success or

failure in one year’s time.

Even in the often volatile

world of agricultural commodities, situations that create a “failure” or “success”

scenario usually develop

slowly, and the trends can

typically be identified by

comparing the co-op’s performance over several years. 

A multi-year summary of

selected financial data will

show the company’s performance over the past few

years. If the annual report

doesn’t have this section, prior annual reports can be

used, as will be discussed in

the next section. 

This section usually provides a quick overview of the

cooperative’s financial trends.

Usually it will include 3-5 years’ worth of comparisons. This

section may include sales, gross margins, net margins, assets,

debt and equity. Other information that might be included is

per-unit comparisons. 

For example, a dairy cooperative could have its financial

data compared on a hundredweight basis. This section might

also include sources of patronage distribution and allocation.

For example, how much income was allocated to members

per bushel of grain delivered or gallons of petroleum purchased? Financial ratios might also be found in this section. 

Checking a company’s financial trends over several years provides a meaningful picture of where the company has been

and is heading. It also puts into some perspective the CEO’s

report and management’s discussion and analysis as to the

future direction of the company. 

Financial statements

By now, you should have a good idea of how the cooperative performed during the past year and where it is heading. The financial statements should support the prior sections and provide the details. If the annual report did not

include the CEO’s report, management’s discussion or multi-year summary, then you will need to get out your pencil,

paper and calculator. 

The best way to look at the

financial statements is to

compare them over time. So

pull out the annual reports

saved from the past few years.

Financial analysis is beyond

the scope of this article and

there are many good books

that cover this topic in detail.

However, a brief overview of

things to look for follows.

• Look at the balance

sheet. This shows what the

cooperative owns (assets)

and who lays claim to those

assets (liabilities and equity).

The first concern should be

liquidity. How has the cooperative’s liquidity been moving over time? Variations in

a cooperative’s liquidity are

normal. What should be a

concern is a downward

trend. If there is a trend,

either up or down, look at

the individual components of

current assets and current

liabilities and see what is

causing the movement.

Declining liquidity could

pose trouble in the short run

and cause problems raising operating capital. 

• Next look at leverage. Leverage is the use of borrowed

funds to capitalize the cooperative. High levels of debt in

and of itself do not mean problems. Most fixed assets are

purchased with a combination of borrowed funds and equity

capital from members. There is a problem if leverage continues to increase while operations stagnate. This trend

could indicate that the cooperative is borrowing funds to

finance operations. 

• Looking at how a cooperative uses its assets provides a

look at efficiencies. Turnover ratios illustrate how well a

cooperative uses its assets to generate sales or how well they

control the assets. When a trend is spotted, it is important to

look behind the numbers and see what is causing the trend.

For instance, a sharp decline in fixed asset turnover would

imply the cooperative sales are not supporting its investment

in its fixed assets. Or it may indicate that the cooperative has

invested in its fixed assets in anticipation of future growth.

The current operations may not fully utilize the expanded

assets, which will suppress the turnover ratio.

•Sales, inventories and receivables are three important values to be investigated. Viewed individually they are important,

but taken together they tell a good part of the co-op’s operaAnother inside page from the text portion of Diamond of California’s

2001 annual report, highlighting some of its retail marketing efforts.
Rural Cooperatives / January/February 2003 13

tional story. If inventories are increasing at a faster rate than

sales, the company could be experiencing unanticipated inventory buildup. This is not a good sign. If receivables are rising

faster than sales, the company is not collecting its bills. It may

be a sign of deeper problems. 

• When focusing on the operating statement, look at sales,

gross margins, expenses and net income from operations.

What is the trend here? Are sales increasing, decreasing or

flat? If sales are falling and there are no clues as to why, then

management should be questioned as to why this is happening. Declining sales don’t always mean a bad year. Just like

higher sales don’t necessarily mean a good year. If sales are

declining because the cooperative is consolidating operations

and focusing on core businesses, the cooperative could be

more competitive overall.

• “Common-size” the operating statements over the past

few years. That is, divide all values by total sales. Commonsized statements examine what each component of the statement contributes, or takes away, from operations. Be weary

of one-time changes in income. See if expenses are consuming a larger portion of sales. 

• If the financial statements have a cash-flow statement,

this is an excellent area to see how cash is moved around

within the cooperative and indicates, in understandable

terms, a cooperative’s sources and uses of funds. Instead of

digging into every number here, look at the total cash flow

from operations, financing and investing. Note how these

have been trending over time in each of the three sections.

Positive cash flow from operations over time show that operations are strong. Cash flow from investments should tend to

be negative. Cash flow from financing should be neutral over

time. Of course, this is general. If there are differences, look

deeper and ask questions.

Foot notes

Last, but not least, are the foot notes. The notes that follow the financial statements should be read in conjunction

with them. The notes provide a detailed description of what

some of the numbers in the financial statements mean. This

is where the auditor reports changes, problems, deviations

and other anomalies. 

These footnotes are often more revealing than the raw

data. Watch out for reports of such things as: changes in

accounting methods or inventory valuation, new or changed

government regulations, debt realignment, litigation results

or forecasts and unusual events. Some of these events can

have a major impact on the bottom line, either currently or

in the future. Most of all, if something is not clear, ask questions until it is clear. You own the cooperative and it is your

right to know. ■

A broad array of competitive challenges faced by

American farmers in the international and domestic

arenas will be examined when the 2003 USDA Agricultural Outlook Forum, “Competing in the 21st Century,” is held Feb. 20-21 in the Washington suburb of

Arlington, Va. On the international front, experts will

examine prospects for increased competition from

Central and Eastern Europe, Brazil and Asia, as well

as progress in bilateral trade agreements and WTO

negotiations. On the domestic front, topics range from

the growing complexity and cost of regulations, to

market access, to dealing with food safety and

changing eating habits.

A year of weather-reduced crops here and abroad

underscores the risks farmers face. On the program

are a focus session on producers’ experience with

new crop insurance provisions in effect this year, and

a panel of meteorologists discussing weather patterns and the impact on agriculture.

U.S. Agriculture Secretary Ann Veneman will deliver

the keynote address, USDA Chief Economist Keith

Collins will provide a preview of agricultural prospects

for 2003, while FFAS Under Secretary J.B. Penn will

look at major U.S. trade and ag policy questions. Dan

Kelly, Growmark chairman, will moderate a panel discussion on competing in the 21st century, and

USDA/RBS Deputy Administrator Randall Torgerson

will moderate a panel discussion dealing with one of

the hottest “growth areas” for cooperatives: livestock

producer initiatives. There will be separate panel discussions or lunch speakers addressing market outlook

for grains and oilseeds, cotton and fibers, livestock

and poultry, milk and dairy, sugar and sweeteners,

floriculture/nursery/greenhouse and tobacco. 

For the full agenda, visit: http://www.usda.gov/oce/

waob/oc2003/program.htm .

Registration, including all meals, costs just $250.

Register online at:

http://www.usda.gov/oce/waob/agforum.htm , or by

phone: (202) 314-3451.

The Forum will be held at the Crystal Gateway

Marriott Hotel in Arlington, Va. To receive the discounted room rate of $144, plus tax, single or double,

call the Marriott at (703) 920-3230 and mention the

USDA Agricultural Outlook Forum. Discount subject to

availability after January 20.

Further questions? Contact, toll free, 877-891-2208

or e-mail agforum@oce.usda.gov. ■

USDA Outlook Conference to focus on critical challenges 
14 January/February 2003 / Rural Cooperatives
By Elizabeth Doran, 

staff writer

Syracuse Post-Standard

Editor’s note: the following article is

reprinted from the Nov. 27, 2002, 

Syracuse Post -Standard.

wo Cornell University

professors who studied

Agway Inc. blame its

bankruptcy on a string of

financial losses and the

company’s involvement in too many

businesses.

Although they criticize management

for its decisions, they also say the cooperative’s members bear some responsibility for pressuring management to

make bad decisions—such as insisting

that local feed plants be kept open even

if they were losing money.

And they say there were plenty of

warning signs for investors that the

company was in trouble. It filed for

Chapter 11 bankruptcy protection in

October. Bruce L. Anderson and Brian

M. Henehan said they analyzed the

failure of Agway because of widespread

interest from other cooperatives,

lenders, extension associates and university researchers.

Anderson is an associate professor

and Henehan a senior extension associate in Cornell’s Department of Applied

Economics and Management. Both

have studied the operations of Agway

and other cooperatives.

Anderson and Henehan used

Agway’s annual reports, press releases,

filings with the U.S. Securities and

Exchange Commission and their own

experience in preparing the eight-page

report. Agway had

losses in eight out of

19 years starting in

1984, they said in the

report, titled “What

Went Wrong at

Agway.” Combined,

those losses exceeded

profits by $139.2 million, the report says.

“That says to me

that somebody isn’t

holding someone’s feet

to the fire,” Anderson said. One challenge is figuring how to improve a

cooperative’s business performance

when there are conflicting goals,

Anderson said. For example, the cooperative wants to make money, but

members don’t want to close their

neighborhood feed plant.

Which is why, Anderson said, that

although management must be held

accountable, some of the blame must

be shouldered by members who pressured the cooperative to keep local

plants open even when it wasn’t financially feasible.

“You have to make business decisions,” he said.

Although it was Agway’s policy not

to become involved in dairy processing,

the cooperative bought H.P. Hood in

1980, the report says. Agway didn’t

have any experience running a fluid

milk business, and in 1995 sold Hood

because of mounting financial losses,

the report said.

The report details other factors

affecting Agway, including: 

• An emphasis in the ’70s and ’80s

on size over profitability; 

• A strong link between how much

money members have at risk in the

cooperative and the interest they take

in the organization. It takes an investment of only $25 to become an Agway

member.

• Reliance on “tax paid retained

earnings” as its primary source of equity because equity wasn’t coming from

members. It can’t be sustained without

consistent positive earnings.

• Heavy use of debt. From 1998 to

2001, Agway’s equity-to-total-asset

ratio averaged 12.6 percent, the

report said. The professors say when

the ratio drops below 15 percent, that

usually points to several financial

problems.

Stephen Hoefer, speaking for Agway,

said problems confronting Agway have

been historical challenges, as the report

notes. These include being highly leveraged and not having a lot of equity capital, he said. Hoefer also agreed that it’s

been a challenge for Agway to keep its

members involved.

The report highlights many warning

signs that should have alerted investors

and members to Agway’s troubles, the

report said. For example, Agway’s 2002

T

What went wrong at Agway?

Cornell professors describe how co-op’s chickens came home to roost

Rural Cooperatives / January/February 2003 15

continued on page 38
By Steve Thompson, 

writer/editor 

USDA Rural Development

eff Hohman tells you

straight out, he loves his

job. He’s a biologist for

East Kentucky Power

Cooperative (EKPC), a

power-generation cooperative with 16

member electric-distribution co-ops in

Kentucky. The co-op pays him to

spend many workdays “playing” with

frogs and snakes and talking about

them to school children. 

For the past three years, EKPC

has run a wildly popular program

with six staff biologists who educate

Kentucky school children about local

wildlife. They visit two schools in a

typical day, presenting lectures and

slide shows to up to five classes on

each visit.

Meanwhile, most of the co-op’s

diesel trucks are running on soy-blended “bio-diesel” fuel—which produces

fewer harmful toxins and greenhouse

gases compared to conventional,

straight petroleum-based diesel oil.

And the co-op is getting ready to start

producing power from recovered landfill gases. It is also exploring wind power and other alternative methods of

power generation.

All these initiatives are part of an

aggressive effort by the management of

EKPC to run an operation that promotes environmental responsibility.

“We’re showing that power generation, good business practices and environmental responsibility can work

hand-in-hand,” says co-op president

Roy Palk.

Nation’s lowest power rates

According to Palk, increasing regulatory pressure and public opinion have

pushed environmental issues into the

spotlight for the co-op. Coal is readily

and cheaply available in the region, and

coal-fired boilers generate 97 percent

of EKPC’s power output. One advantage of coal is low-cost generation.

According to the Department of Energy, Kentucky power customers pay the

lowest rates in the country. 

However, burning coal creates environmental problems, including particulate emissions and nitrogen and sulfur

compounds that can contribute to acid

rain. Emission problems can be

addressed with pollution-reduction technology, including scrubbers, selective

catalytic reduction units and new combustion methods. Nevertheless, the coop felt it necessary to go beyond meeting

the letter of current regulations.

“We had no choice but to respond

to people’s concerns,” says Palk. “We

couldn’t just jump into the bunker.” 

“A lot of customers on our system are

farmers,” says Kevin Osbourn, who handles media relations for the co-op. “So

using soy oil in our own trucks is a good

way to help farmers while we’re cutting

pollution.” The co-op took advantage of

a state grant that offsets the 10- to 20-

cent per gallon premium on a purchase

of 9,000 gallons of bio-diesel.

USDA loan focuses

attention on wildlife

While public support is growing for

EKPC’s green-power initiatives, it is

the co-op’s environmental education

program that has gained the most

attention. The program is run on

behalf of EKPC’s 16 member distribution cooperatives (see sidebar).

Bill Prather, spokesman for EKPCmember Owen Electric Cooperative, is

an enthusiastic proponent of the program. “It’s a wonderful experience for

the students; it really energizes them,”

he says. “And it’s a great reflection on

our co-op.” That’s because each lecture is given in the name of the local

distribution co-op. And Prather notes

that the students of today are tomorrow’s co-op members.

Hohman, who oversees the lecture

program, has a degree in biology, but

he originally worked for the co-op as a

chemist, analyzing the chemical makeup of different batches of coal used in

the co-op’s boilers. Then the Rural

Utilities Service of USDA Rural Development provided the co-op with a loan

16 January/February 2003 / Rural Cooperatives

J

Frogs, snakes & kilowatts

East Kentucky Power Co-op finds green in environmental program

Jeff Hohman, head of East Kentucky Power

Cooperative’s Natural Resources and

Environmental Communications staff, introduces a hog-nosed snake to an elementary

school student. Photo by John Gitner, courtesy

East Kentucky Power Cooperative 
for new transmission lines, which

added to his workload. 

Under the terms of the USDA loan,

the co-op was required to report on the

impact of the new construction on local

wildlife. The task fell to Hohman and

several co-workers. He took to walking

the transmission lines on Fridays and

weekends after his regular work was

finished, and collected a few animals as

part of this work.

Hohman says the seed for the education program was planted when he

was invited to a school “career day,” in

which people of various occupations

tell the students about their work. He

decided to bring along some live animals to make his presentation more

interesting. “It was a huge hit,” he says,

and his wildlife lecture was soon in

great demand. 

Hohman has found a new niche at

the co-op. He left the laboratory in

1997 after co-op management decided

to create a new Natural Resources and

Environmental Communications staff.

He now supervises five other biologists.

“Jeff’s not the kind of biologist you want

to keep in a lab,” says Palk. “He’s articulate and passionate, and a great advocate

for environmental responsibility.”

Promoting conservation

The staff does much more than

speak in schoolrooms; it’s actively

involved in conservation efforts across

the state. Co-op biologists spend their

summer months performing biological

surveys to determine if endangered

species are present. They also harvest

seed to encourage the planting of

native wild plants. 

The staff harvests and packages

native wild grass and flower seed and

provides it to garden clubs, conservation organizations and individuals for

planting in fields and along roadways.

The environmental staff also maintains a Web site that offers, among

other things, instructions for building

houses for bats.

Hohman’s staff also launched a volunteer program called “Frog Loggers,” which recruits people to

survey the local frog population (see below). 

EKPC has won a number of

awards from local environmental

groups. But Prather seems less

interested in the awards than in

the impact they have on the customers of Owen Electric Cooperative, a power-distribution coop which is a member of EKPC.

He points out that a quarterly

survey taken by the distribution

co-op consistently shows that its

members are interested in environmental issues. “It’s a valuable

theme to use in communication

with our members,” he says.

Prather has other reasons for supporting EKPC’s green initiatives.

Knowing that the power-generation

co-op is taking concrete action to

improve Kentucky’s environment “just

makes you feel good,” he says. “We

view it as part of our commitment to

our community. It’s part of making the

area we serve a better place to live.”

Toyota request gets

‘eco’ ball rolling 

EKPC’s landfill methane-recovery

project is a vivid example of this commitment to environmental stewardship. The project sprang from a

request by a major customer of one of

its member co-ops. 

Toyota Motor Manufacturing North

America Inc. headquarters is located in

Erlanger, Ky., and is served by Owen

Electric. Owen turned to EKPC when

Toyota asked for a renewable source for

much of the 130,000 kilowatt-hours of

power consumed every month by the

laboratory on its Erlanger campus.

That request led quickly to a “green

power” option for Owen Electric customers, which was first offered in 

January 2002 to homes and businesses.

Customers could opt to buy 100-kilowatt-hour blocks, each of which carried

a $2.75 surcharge. 

Soon other member co-ops expressed

interest in the program as well. In June,

Inter-County Energy Cooperative

joined the green power program; in July,

Blue Grass Energy Cooperative joined

and, in August, Clark Energy Cooperative climbed aboard. Other member 

co-ops have also expressed an interest in

the program.

Providing the power from a renewable source was simple enough. EKPC

began by buying from another producer, then selling the power, in turn, to

the distribution cooperatives. But the

generation co-op, which prides itself on

the low cost of the power it provides its

members, then began exploring ways to

generate green power on its own, and

possibly to save some money doing it.

Reliable power source

a must for EKPC 

To make construction of a greenpower source economically feasible, coop management quickly decided that

the power source had to provide baseload generation—that is, the generation had to be both constant and reliable. That left out wind and other

sources more suitable as supplemental

power sources because of their intermittent nature. Ralph Tyree, a construction engineer project coordinator

working in the resource planning

department, was given the task of

determining if a practical source of

renewable baseload power could feasibly be developed. With the help of a

consulting firm, he looked at hydroelectric and other sources before finally

determining that landfill gas offered a

workable solution. 

Landfill gas is growing in popularity

Rural Cooperatives / January/February 2003 17

EKPC staff members often host nature walks along the

co-op’s power distribution right-of-ways. Photo by John

Gitner, courtesy East Kentucky Power Cooperative 
18 January/February 2003 / Rural Cooperatives

as a source of renewable energy. It’s relatively cheap, and sources are readily

available—every municipality has to put

its trash and garbage somewhere. A landfill-gas generator produces power by

burning methane gas that would otherwise escape into the atmosphere, where it

is 21 times more destructive as a greenhouse gas than carbon dioxide, the gas

produced by its combustion (for more

information about power generation

from landfill gas, see Vermont Electric Co-op Looks to Landfill for

Methane Recovery, in the Jan../Feb.

2002 issue of Rural Cooperatives,

on-line at: www.rurdev.usda.gov/

rbs/pup/openmag.htm). 

There were a number of

potential sites available close to

the co-op’s main lines. After

scouting numerous locations and

negotiating with landfill operators, Tyree and the co-op management settled on three initial

sites: Bavarian Landfill in northern Kentucky, near Walton,

Green Valley Landfill in

Greenup County and Laurel

Ridge, near London, Ky. 

Each landfill will produce from 2.4

to 3.2 megawatts of clean energy initially, with possible expansion later at

Laurel Ridge and Green Valley. The

gas will be drawn out through wells

drilled into the landfill and burned in

large reciprocating engine/generator

units—similar to stationary diesel generators—each capable of producing

800 kilowatts.

Not depending on subsidies

Although federal subsidies are available for the production of power using

landfill gas, Tyree says the co-op did

not take possible subsidies into consideration when calculating costs. “The

subsidy programs have to be funded by

Congress every year,” he says, “and so

we didn’t think it was wise to depend

on them.” 

Even so, Tyree says that the overall

cost of landfill-gas-generated electricity

will be competitive with other baseload

options. “If we do get a subsidy,” he

says, “that’ll just be icing on the cake.”

The landfill-gas “Enviro-Watts”

project—run in partnership with participating distribution co-ops—is expected

to start construction as soon as the requisite permits are issued, at a cost of

approximately $4 million for each generation plant. EKPC plans to get all the

generators on line this summer. 

But already the program is attracting

a lot of attention, says co-op spokesman

Kevin Osbourn. “We wanted to have

our ducks in a row before we started

publicizing the project; so we only

started calling attention to it recently.

We’ve been pleasantly surprised at the

response. People are really excited.” 

Prather, spokesman for Owen Electric, is a bit more cautious. Owen

began offering green power subscriptions to all its customers in January

2002. He says the co-op has received a

lot of good exposure in the local news

media, but that hasn’t yet translated

into customer interest. Out of 48,000

customer accounts, just 100 have

signed up so far.

“We didn’t expect a huge response,

because most people aren’t even aware

of green power,” he says. “But there’s a

minority who are quite fervent in their

desire to buy it.” 

Prather believes that consumer education will raise awareness and

demand, and that the landfill-gas project will also increase interest. “Right

now, when people ask where our green

power is coming from, we have to tell

them it’s from out of state. Often,

they’re less interested when they hear

that. But when we can tell them it’s

keeping down pollution in their own

area, that’ll make a difference. One of

the landfills is nearby, next to an interstate highway, so we can point to that.”

Evaluating wind power

Eastern Kentucky’s commitment to

environmentally sound power generation has given Tyree a new job, as

full-time head of the Green Power

staff, which is also looking into

wind-power and small-scale hydroelectric generation. In February

2002, 15 possible wind-power sites

were surveyed in the southeastern

part of the state, and two were chosen for further evaluation. 

After signing agreements with

the landowners, the way has been

cleared for the construction of two

data-collection towers. They will

operate for at least several months,

after which the information they

gather will be evaluated. A decision will then be made about

whether to proceed further. 

“We don’t really know if wind generators are feasible here in Kentucky,” says

Tyree. “But those two sites offer the

most potential.” Tyree’s office has looked

at three possible low-impact hydro-electric sites, and is considering the use of

new-technology “micro-turbines,” which

each generate about 70 kilowatts.

Alternative power sources can go

only so far in addressing environmental

concerns, so the co-op is also aggressively pursuing cleaner-burning technologies for its coal-fired generators.

One initiative is the planned installation of selective catalytic-reduction

technology at the plants. This technology works much like the catalytic converters on cars, reducing nitrogen

oxides that older technologies, such as

scrubbers, don’t catch. 

The co-op’s newest plant, expected

to go on-line with a capacity of 268

megawatts in the spring of 2005, will

use a new combustion system called a

circulating fluidized bed. The new

boiler allows the recycling of particuEKPC President/CEO Roy Palk (seated) and Randy Seymour,

founder of the Kentucky Native Seed Cooperative, harvest

native grass seeds, which will be used along EKPC right-ofways. The native grasses create wildlife habitat and are

easy to maintain. Photo by Kevin Osbourn, courtesy East

Kentucky Power Cooperative 
Rural Cooperatives / January/February 2003 19

EKPC offers three nature lectures to students from

kindergarten to grade 12.

The lectures offered include one about reptiles and

amphibians native to Kentucky, which includes a

chance for the children to handle live, non-venomous

snakes, lizards, salamanders, toads and frogs. Another

teaches about the several species of bats inhabiting the

area, while a third offers a survey of the wildflowers of

the state. The lectures are so popular that they have

waiting lists of up to two years. 

The program reaches about 50,000 students per

year—students who take away with them a greater

appreciation of Kentucky’s natural world. “We do a 20-

minute slide show, and then hand out the animals, says

Hohman. “At the beginning, we’ll have a bunch of kids

that are squeamish about the animals. But by the time

we’re finished, just about all of the kids will have handled them. It really makes a difference in the way they

look at wildlife.” 

At the end of the session, every child is given a free

Earth Day poster issued yearly by the co-op. The current

poster illustrates Kentucky dragonfly and damselfly

species. Previous posters have included native frogs,

butterflies, salamanders, snakes and orchids. ■

2-year waiting list for wildlife lectures

late waste until it is fully incinerated, and will burn fuel at

lower temperatures, reducing

nitrogen oxides. The boiler

also is capable of burning tires

(many of which currently wind

up in illegal dumps), along

with biomass as fuel.

Frogs: an eco-barometer

When Jeff Hohman lets a

wide-eyed sixth grader hold a

narrow-mouthed toad in his

cupped hands, or convinces squirming junior high school students not to

fear letting a corn snake coil about

their arms, he’s doing much more

than teaching them about the wonders of Kentucky wildlife. He’s also

driving home the point that creating

alternative energy sources is good for

humans and ‘critters.’ 

Who knows, he may even find a volunteer today for the Frog Logger program, founded by EKPC’s Environmental Education staff. This program

is now part of the U.S. Geological Survey’s North American Amphibian

Monitoring Program—an effort to

establish a data base of frog populations for monitoring possible future

changes in frog numbers. 

Frogs, Hohman explains to the students, seem to be particularly vulnerable to pollution, because their skins

absorb substances directly from the air

and water. In some areas of the world,

frog populations are declining for reasons that are not clear, and some

researchers believe that changes in frog

populations might signal environmental problems. 

The effort is run entirely by volunteers. Participants learn to identify different frog and toad species by their

calls, and note the species they hear

along a set survey route. 

And a world that is safe for frogs,

Hohman says, is safer for people too. ■

EKPC’s classroom lectures

annually teach

more than 50,000

students to

appreciate

Kentucky

wildlife, leaving

them with a better understanding of the importance of preserving local

habitat and air and water quality. Photos by

John Gitner, courtesy East Kentucky Power

Cooperative 
20 January/February 2003 / Rural Cooperatives

By David Chesnick, Economist

USDA/RBS Cooperative Services

ooperative board rooms

were very busy places in

2001. While mergers and

acquisitions dominated

the scene in the 1990s,

joint ventures and limited liability

companies were the focus of activity

among the nation’s largest co-ops at

the start of the new millennium. 

Several of the larger cooperatives

merged some of their operations into

new businesses, which had a negative

impact on their sales (which are now

counted under the new business entity). Other cooperatives, striving to

provide additional high-return marketing options for members’ products,

formed ventures with non-cooperatives

to operate value-added processing

facilities. Any net margins generated by

these ventures were added to the cooperative’s bottom line in the way of nonoperating revenue.

Total revenue for the Top 100 co-ops

climbed 3.8 percent, to $74.2 billion in

2001, while net margins increased nearly 10 percent, to more than $502 million. Still, most cooperatives found

2001 a difficult year, with 2002 not

showing much of an improvement.

Indeed, two of the nation’s largest coops (Farmland and Agway) filed to

reorganize under Chapter 11 bankruptcy in 2002, and several other major coops are facing serious financial stress.

However, most cooperatives should

come out of these trying times stronger.

In order to compete, cooperatives will

need to rely less on debt and more on

member equity. A stronger equity position provides a cushion when the economy dictates a prolonged downcycle, as

we currently are experiencing. 

Cooperatives also need to determine

their long-range goals and try to focus

on their individual strengths. There are

many ways a cooperative can get distracted from its mission. This is especially true during hard times, when

everyone is looking for ways to bring in

extra revenue. Cooperatives should

resist the urge to be all things to all

members, and should focus on those

areas where they have a greater competitive advantage. 

Revenue

Total revenue for the Top 100

cooperatives jumped $2.7 billion, to

$74.2 billion, in 2001 (table 1). Dairy

cooperatives, with an increase of $2.8

billion in revenue, accounted for

most of the increase. Prices earned

and volume handled both increased

for dairy co-ops in 2001. Poultry &

livestock, fruit & vegetable and sugar

cooperatives also saw their revenues

increase in 2001.

Revenue from farm supply sales for

Top 100 co-ops declined 2.1 percent,

to $18.4 million. But co-ops that sell

only farm supplies (excluding diversified supply/grain co-ops) saw revenue

increase $621 million. Higher demand

pushed up prices for energy products,

which fueled much of the increase in

farm supply sales. 

Diversified supply/grain cooperatives

suffered the largest decline in revenue,

with a drop of $942 million from 2000.

Part of this decline can be attributed to

a large co-op moving some operations

to a joint venture with other cooperatives and investor owned-firms (IOFs).

In a case such as this, sales (for this survey) are no longer attributed to the coop, although a share of net margins

from the joint venture is allocated back

to the co-op. Some of the decline was

also caused by lower demand for

agronomy products. 

Most Top 100 grain cooperatives

enjoyed higher revenue in 2001, due

mostly to higher prices. Crop volume

remained steady. However, a few cooperatives had substantial declines in

grain sales, and their losses caused revenue for the overall grain sector to

remain relatively flat in 2001.

Gross margins were up for the Top

100 cooperatives. However, not all

cooperatives faired well in this area.

Farm supply cooperatives ended 2001

with lower gross margins, mostly due

to higher cost of raw materials. Some

co-ops were able to pass along this

price increase to their members, but

others could not. 

Cotton cooperatives also saw gross

margins fall. Whether by choice or

design, cotton cooperatives did not

pass the full decline in prices along to

their members. This resulted in a $44

million decline in gross margins. 

Several of the commodity groups

marketing member products cut their

cost of goods sold. This implies that

grain, rice and poultry & livestock

cooperatives were paying their members a smaller percentage of their

sales to cover higher operating

expenses.

Operating expenses

Operating expenses for the Top

100 cooperatives were up 2.5 percent,

C

Large co-ops see growth in ‘01,

reverse declining net margins 
to $5.6 billion, in 2001. Farm supply,

grain, poultry & livestock, rice and

sugar co-ops all posted higher operating expenses, which pushed up operating expenses for all of the largest

cooperatives. 

In these sectors, all but poultry &

livestock cooperatives reported higher

labor expenses. All the other sectors

reported lower labor expenses, which

helped keep their total operating

expenses below 2000 levels. 

Net operating margins

Net operating margins were up 6.4

percent for the Top 100 co-ops in

2001. However, not all sectors performed well. Most farm supply cooperatives had lower margins, and a few

were hit hard by a combination of lower gross margins and higher expenses.

This caused substantial losses from

operations in 2001 and resulted in the

whole sector posting a net loss from

operations. Cotton, sugar and rice

cooperatives also ended the year with

lower operating margins. 

Diversified (supply/grain), fruit &

vegetable, grain and poultry & livestock cooperatives had substantial

increases in their net operating margins. These increases pulled up the net

operating margins by nearly 10 percent

for the overall Top 100. Each sector

had a unique situation that contributed

to improved operations. 

Responding to the decline in sales

revenue, diversified cooperatives were

able to control the cost of goods sold as

well as to lower their operating expenses. This resulted in a 24-percent

increase in operating margins. 

Fruit & vegetable cooperatives were

also able to control expenses, and to

pass most of their increased sales on to

their operating margins. Poultry &

livestock cooperatives found themselves in a similar situation, but they

were not as successful in controlling

expenses. However, higher gross margins were more than enough to offset

increased expenses.

Grain cooperatives cut their cost of

goods sold enough to compensate for

stagnant sales and higher expenses. 

Other operating 

income and expense

Interest income and expense,

income and losses from subsidiaries,

rent, patronage refunds and other

items not directly related to operations

are included in other “operating

income and expense.” Revenues and

expenses not directly related to operations resulted in $442 million in

expenses, $38 million less than in 2000. 

Most of this decline in expenses is

due to other income from dairy and

poultry & livestock cooperatives.

Income from subsidiaries for these

commodity groups, as well as onetime policy changes, helped push up

other income by $62 million. Other

income not directly related to operations reached $323 million in 2001.

Interest revenue was flat compared to

2000 while patronage refunds were

up $9 million. 

For the largest cooperatives, interest

expense was by far the biggest expense

not directly tied to operations. Nearly

all cooperative sectors had higher

interest expenses in 2001, which

jumped $55 million to a record high of

$810 million. Diversified cooperatives

accounted for 40 percent of the total

increase in interest expense. Only grain

and sugar cooperatives lowered their

interest expense. 

Rural Cooperatives / January/February 2003 21

Table 1—Consolidated Statement of Operations:

Top 100 Cooperatives, 2000-01

2001 2000 Difference Percent 

$ thousand Change

Revenues

Marketing 54,991,765 51,893,235 3,098,530 6.0

Farm Supply 18,418,734 18,818,592 (399,858) -2.1

Total Sales 73,410,499 70,711,827 2,698,672 3.8

Other Operating Revenues 773,525 796,729 (23,204) -2.9

Total Operating Revenues 74,184,024 71,508,556 2,675,468 3.7

Cost of Goods Sold 67,613,430 65,132,847 2,480,583 3.8

Gross Margin 6,570,594 6,375,709 194,885 3.1

Expenses

Operating Expenses 5,613,542 5,476,282 137,260 2.5

Net Operating Margins 957,052 899,427 57,625 6.4

Other Revenues (Expenses)

Interest Expense (810,127) (754,924) (55,203) 7.3

Interest Revenue 94,232 94,276 (44) 0.0

Other Income 323,153 260,288 62,865 24.2

Other Expenses (92,227) (114,055) 21,828 -19.1

Patronage Revenue 43,457 34,855 8,602 24.7

Net Margins from Operations 515,540 419,867 95,673 22.8

Non-Operating Rev. (Exp.) (13,084) 37,184 (50,268) -135.2

Net Margins 502,456 457,051 45,405 9.9

Distribution of Net Margins

Cash Patronage Dividends 241,038 220,146 20,892 9.5

Retain Patronage Dividends 368,529 210,548 157,981 75.0

Nonqualified Non-cash Patronage 16,112 19,021 (2,909) -15.3

Dividends 39,029 47,279 (8,250) -17.4

Unallocated Equity (105,846) (24,643) (81,203) 329.5

Income Tax (56,406) (15,300) (41,106) 268.7

Total Distribution 502,456 457,051 45,405 9.9
Net margins from operations

Net margins from operations were

up $96 million, to finish 2001 at $515

million. Leading this increase were

poultry & livestock cooperatives, which

turned a net loss of $43 million in 2000

into a net gain of $45 million in 2001.

Dairy, diversified, fruit & livestock and

grain cooperatives also increased their

net margins from operations. 

On the other hand, cotton, farm supply, rice and sugar cooperatives all had

lower net operating margins. Farm supply and sugar cooperatives ended the

year with larger net losses than in 2000.

Farm supply cooperatives ended the year

with net operating losses of $100 million.

Non-operating revenue and expenses include extraordinary gains/losses,

gains/losses from discontinued operations or accounting changes. In 2001,

this equaled a net expense of $13 million for the Top 100 co-ops, with diversified cooperatives accounting for the

majority of the expense. Farm supply

and dairy cooperatives were the only

sectors that had non-operating revenue. 

The bottom line: the largest cooperatives ended 2001 with net margins of

$502 million, up $45 million from

2000. The leading sector was dairy.

While net margins were up for the

largest cooperatives, so too were net

losses. Fifteen Top 100 cooperatives

suffered net losses in 2001, down from

17 in 2000. However, total losses

amounted to $350 million, up from

$254 million in 2000.

Distribution of net margins

Cash payments to members were up

9 percent in 2001. For those cooperatives that had net margins to distribute,

28 percent was allocated cash payments. This compares to 31 percent in

2000. Seventy-five percent of net margins were allocated back to members in

cash and qualified allocated equity,

compared with 70 percent in 2000. 

Dairy cooperatives allocated more

than their net margins. This was due to

a substantial amount of previously

unallocated equity being allocated back

to members of some co-ops.

On the other hand, fruit & vegetable and poultry & livestock cooperatives allocated little of their net margins back to their members in 2001,

instead adding most of their net margins to a deferred equity account to be

allocated at a later date. Poultry & livestock co-ops used net margins to

replenish unallocated equity, which was

used in 2000 to absorb net losses.

With more margins being allocated

back to members in 2001, non-qualified

patronage refunds and dividends were

down. Non-qualified patronage refunds

were down 15 percent, to $16 million.

Dividends paid to share holders fell 17

percent, to $39 million.

The 15 cooperatives that suffered a

net loss in 2001 deducted some of that

loss from deferred patronage, but most

of it was deducted from the unallocated

22 January/February 2003 / Rural Cooperatives

Table 2—Combined Balance Sheet: All Cooperatives Top 100 

Cooperatives, 2000-01

Percent

2001 2000 Difference Change

Assets $ Thousand

Current Assets

Cash 880,360 704,462 175,898 25.0

Accounts Receivable 5,778,956 6,106,753 (327,797) -5.4

Inventory 5,865,377 6,228,431 (363,054) -5.8

Other Current Assets 1,379,382 1,227,134 152,248 12.4

Total Current Assets 13,904,075 14,266,780 (362,705) -2.5

Total Investments 4,252,517 4,008,108 244,409 6.1

Net PP&E 8,700,579 8,770,000 (69,421) -0.8

Other Assets 3,058,603 2,808,338 250,265 8.9

Total Assets 29,915,774 29,853,226 62,548 0.2

Liabilities

Current Liabilities

Total Short-term Debt 3,341,825 3,775,334 (433,509) -11.5

Accounts Payable 3,585,340 3,574,155 11,185 0.3

Member Payables 551,684 487,388 64,296 13.2

Patron and Pool Liabilities 1,434,194 1,470,407 (36,213) -2.5

Other Current Liabilities 1,755,716 1,984,672 (228,956) -11.5

Total Current Liabilities 10,668,759 11,291,956 (623,197) -5.5

Long-term debt 7,083,163 6,490,032 593,131 9

(less current portion)

Other liabilities and deferred 1,137,885 1,054,019 83,866 8.0

credits

Total non-current liabilities 8,221,048 7,544,051 676,997 9.0

Total liabilities 18,889,807 18,836,007 53,800 0.3

Minority interest 899,995 891,504 8,491 1.0

Member equity

Preferred stock 1,794,562 1,790,651 3,911 0.2

Common stock 733,063 731,369 1,694 0.2

Equity certificates and credits 6,050,674 5,964,779 85,895 1.4

Unallocated capital 1,547,673 1,638,916 (91,243) -5.6

Total equity 10,125,972 10,125,715 257 0.0

Total liabilities and equity 29,915,774 29,853,226 62,548 0.2
account. Losses also generate a net tax

benefit, which was again greater than

the amount of taxes paid in 2001. 

Assets 

Assets for Top 100 co-ops remained

steady, at $30 billion, in 2001 (table 2).

However, the makeup of those assets

has changed. Current assets fell by

$363 million, due to declining accounts

receivable and inventories. Most of the

decline in accounts receivable and

inventories occurred in the diversified

and farm supply sectors. Cash balances

for all of the largest cooperatives were

up 25 percent, mainly due to dairy and

diversified cooperatives.

Total investment reached $4.8 billion, up 6 percent from 2000. Most of

the $244 million increase was attributed to non-cooperative investment,

which increased $199 million. Almost

all of the increase in non-cooperative

investment was concentrated in joint

ventures and other partnership

arrangements between cooperatives

and non-cooperative businesses. However, “other investments” declined,

which kept the non-cooperative investment below the $200 million mark.

“Other investments” includes items

such as notes receivable, property held

for sale, marketable securities, leases

receivable and the like. Dairy and

diversified cooperatives had the largest

increase in non-cooperative investment, at $256 million. 

Cooperative investment, excluding

investment in CoBank, increased 3 percent. Most of this increase was concentrated in the diversified and farm supply cooperatives, which accounted for

87 percent of increased investment in

other cooperatives. CoBank investment

declined by $5 million.

Net fixed assets fell 1 percent in

2001. With the exception of dairy and

diversified cooperatives, all other sectors had less fixed assets. This is not to

say that most cooperatives were not

investing in fixed assets. Rather, it indicates sales of fixed assets and depreciation were greater than new purchases. 

Liabilities

As was the case with assets, total liabilities remained relatively unchanged

in 2001, yet the makeup of the liabilities changed substantially. Current liabilities fell 6 percent, due to decreasing

amounts of short-term debt along with

other accrued payables. 

Short-term debt was down 11 percent, to $3.3 billion. Leading the

decline were diversified, fruit & vegetable, poultry & livestock and sugar

cooperatives. These sectors used $903

million less short-term debt in 2001.

Cotton, farm supply and grain cooperatives required $463 million in additional operating loans than in 2000.

Most of the increases in these sectors

were loans from CoBank. 

Accounts payable increased 13 percent, and member-payable and pool liabilities rose 1 percent. This is interesting,

given that inventory levels fell 6 percent. 

Usually, inventory levels reflect payments for those products. For example,

farm supply cooperatives had lower

accounts payable with lower inventory

levels, as would be expected. On the

other hand, cotton and grain cooperatives had higher levels of inventories

but lower member payables. This

would indicate cooperatives might be

using working capital loans to pay

members for unsold members’ products. In fact, short-term debt was higher for both of these sectors. 

Dairy cooperatives had a large, 16-

percent, increase in member payables.

This $270 million jump in member and

pool liabilities was the main reason

these accounts were higher. It appears

likely this would be the payment members will receive for the successful year

dairy cooperatives had in 2001.

Long-term debt, less amounts curRural Cooperatives / January/February 2003 23

Table 3—Average selected ratios: Top 100 Cooperatives, 2001

Current Quick Debt Long-Term Times Local Fixed Gross Net Return Return

Ratio Ratio To Debt Interest Assets Assets Profit Operating On On

Assets To Earned Turnover Turnover Margin Margin Total Members

Equity Assets Equity

All coops 1.38 0.75 0.62 0.62 3.79 2.88 15.34 15.19 1.14 3.45 7.02 

Cotton 1.29 0.68 0.62 0.36 3.27 2.78 22.31 9.83 0.15 3.53 8.03 

Dairy 1.32 0.94 0.60 0.35 12.39 5.80 32.15 8.31 1.45 5.81 15.21 

Diversified 1.22 0.84 0.73 1.70 1.35 2.18 9.68 10.57 (0.40) (0.34) (3.49)

Fruit/ 1.57 0.69 0.69 0.98 1.73 2.04 11.58 25.60 1.07 2.10 7.93 

vegetable

Farm supply 1.37 0.63 0.57 0.50 1.78 2.30 11.42 14.76 0.32 2.53 6.11 

Grain 1.23 0.58 0.61 0.42 2.41 2.21 8.61 13.33 1.47 4.04 10.31 

Poultry/ 2.42 2.00 0.57 1.42 0.37 2.75 40.69 9.94 2.88 2.17 (52.90)

livestock

Rice 1.69 0.89 0.48 0.33 7.48 2.29 5.48 32.07 2.09 5.11 11.29 

Sugar 1.31 0.68 0.66 1.16 1.19 0.93 1.73 27.96 2.16 1.18 (1.61)
24 January/February 2003 / Rural Cooperatives

rently due, increased $593 million.

However, most of this increase was concentrated within the diversified co-op

sector. Large, diversified cooperatives

increased their use of commercial banks,

as well as issuing their own notes. 

The value of Top 100 agricultural

cooperatives’ minority interest in joint

ventures was up 1 percent, to $900 million in 2001. Dairy cooperatives were

the driving force behind this increase,

due to some new joint venture processing facilities. Most of the other sectors

ended up with lower minority interest. 

Equity

Member equity for the largest 100

cooperatives ended 2001 with no

change in the total amount. However,

there was some movement between

unallocated and allocated equity. 

There were also substantial changes

within each sector. Farm supply cooperatives used unallocated equity to

absorb some of the net losses during

2001. Conversely, diversified, grain and

poultry & livestock cooperatives

replenished their unallocated equity

accounts while revolving member equity. This shifted their equity structure

from allocated funding to unallocated

funding. Dairy cooperatives provided

the impetus for higher allocated equities among the overall Top 100. 

Performance measurements

Performance measurements are

based on the average ratio calculated

for the largest cooperatives, and are

presented in table 3. Averages ratios are

used here to negate the effect of

changes in a few of the largest cooperatives. In other words, when the 6

largest cooperatives generate 50 percent of total sales for all top 100 cooperatives, any changes by these very

large cooperatives would be weighted

more heavily. 

Liquidity remained fairly stagnant in

2001. The average current liquidity

ratio moved from 1.37 to 1.38, while

the average quick ratio remained

unchanged at 0.75. 

Leverage ratios provide a more

long-term look at the capital and debt

structure of a cooperative. The average

long-term debt-to-equity ratio

increased from 0.59 to 0.62 in 2001.

The average total debt-to-asset ratio

was 0.62, up from 0.61 in 2000. 

The combined effect of stable liquidity and higher leverage ratios illustrate the change in the term structure

of the debt held by these cooperatives.

In other words, cooperatives appear to

be shifting their debt loads from shortterm to long-term. Funds generated

from operations were higher in 2001

and were able to fund current operations. Therefore, the need for working

capital loans was down. 

However, some cooperatives

changed their debt structure. Expansion of fixed assets slowed down, yet

long-term debt continued expanding.

This could indicate that some cooperatives were having problems meeting

their current obligations or that favorable interest rates made it advantageous

for them to restructure their debt

towards long-term financing.

Efficiency ratios look at how well a

cooperative uses its assets in generating

sales. Local asset turnover remained at

2.9. This means that each dollar worth

of local assets generated nearly $3 of

sales. Activity ratios indicate that cooperatives slowed down on their investment in fixed assets. Several commodity groups were able to expand their

market through investments in joint

ventures. This was especially evident in

the dairy sector. 

While not an absolute indicator of

fiscal health, profitability ratios provide a

view of financial strength for a cooperative. Average gross profit margins inched

upwards, from 14.9 in 2000 to 15.2 in

2001. However, net operating margins

continued to fall, from 1.3 to 1.1. This

would indicate either that cooperatives

are not able to efficiently handle higher

sales, or that they rely heavily on nonoperating revenue to support operations. 

Return on total assets continued to

trend downward in 2001, falling from

3.6 to 3.4. This ratio focuses on the

results of their operation without

respect to how the cooperative is

financed. This reflects lower efficiencies in the use of the cooperative’s

assets in generating net margins.

Return on member equity is a ratio

that measures the return on member

investment after all expenses have been

deducted, including taxes and interest.

This ratio continues to erode. In 1997,

the average return on member equity

was 14.3. By 2001, that value fell to 7.0. 

The average cooperative in the Top

100 produced higher sales in 2001.

However, generating these sales was not

cost effective for many cooperatives.

One exception was the dairy sector,

which was able to turn those higher

sales into higher margins for members.

Higher total debt levels, along with lower amounts of non-operating revenue,

put pressure on the bottom line. ■

An overwhelming majority of voting stockholders have approved the merger between a pair of Midwest farm

credit associations. The merger consolidates Farm Credit Services of Northeast Wisconsin into Green Stone Farm

Credit Services of Michigan. The new firm becomes the fourth largest cooperative bank in the nationwide Farm

Credit System. The $2.5 billion firm will serve 15,536 customers. ■

Farm Credit Banks merge in Midwest
Rural Cooperatives / January/February 2003 25

verview: Ursa Farmers

Cooperative (UFC) was

formed in 1920 by farmers in west- central Illinois who were seeking to

gain the advantages of volume grain

merchandising. This same concept

holds true today for the co-op’s 2,200

members, who own facilities at six

locations located in west-central Illinois, which annually handle a combined total of more than 20 million

bushels of grain and has sales of $60

million. Services have expanded to

include sale of livestock feed and seed

for corn, soybeans and wheat. The coop also sells crop insurance through inhouse licensed insurance broker Peggy

Duesterhaus. With yearly sales exceeding $65 million and over 82 years of

experience, Ursa Farmers continues to

challenge itself to be a leader in the

field of agriculture opportunities.

Philosophy: Ursa Farmers Cooperative does not believe you can wait to

see what the future may bring. “Our

cooperative must be aggressive in recognizing the needs of its member-owners and

constantly be vigilant to provide solutions

or alternatives to keep its members successful,” says Board Chairman Victor Kerr. 

One Major Challenge: UFC merchandises its grain into the export market using two river terminals on the

mid-Mississippi River. Nearby competitors include corn and soybean

processors which, depending on market variables, are often able to pay

more than the “river values” UFC

pays. As such, UFC does not strive to

be a price leader and therefore must

excel in providing a range of member

services to keep the cooperative structure healthy and profitable for all. 

Farmer members will constantly strive

to derive the greatest value from each

bushel. Relationships that are formed as a

result of having access to a multitude of

services will usually outweigh the small

price discrepancies on a day-to-day basis.

“Ursa Farmers Cooperative continues to

grow because it recognizes its role and

value to its members,” says General

Manager Gerald Jenkins. The cooperative’s focus has been to build a close

working relationship to help each member meet targeted profit levels. 

Marketing or Service Innovations:

UFC has two grain-marketing subsidiaries. Ursa Brokerage Inc. provides

producers access to a full line of brokerage tools for merchandising grain and

livestock. The brokerage company is

represented by a licensed broker, Marketing Manager Roger Hugenberg, and

can offer participants the ability to

hedge grain and livestock with every

available tool. 

The second subsidiary is Ursa

Farm Marketing (UFM) Inc.,

formed in 1998 to help members

better cope with challenging markets, complex government programs

and generally stagnant or falling commodity prices. This unit is a comprehensive financial marketing partner to

the producer. While producers have

always received general marketing

advice from the cooperative, UFM

offers a much greater degree of management assistance. Producer profitability has been the ultimate measuring device for UFM. 

Producers are individually consulted to formulate marketing plans based

on specific financial goals. Producers

work with co-op staff to determine

costs of production, expected sales

and any program payments and establish whether needed profits will likely

be realized. Producers have access to

all forms of hedging tools, including

both CBOT (Chicago Board of

Trade) options and over-the-counter

options, futures and elevator-provided

hybrid contracts. The co-op’s grain

broker assists in every function of the

production and selling process. MarUrsa Farmers Cooperative 

Ursa, Illinois

O

FOCUS ON...

Grain elevators tower above the Mississippi

River at one of the Ursa Co-op’s loading terminals, while co-op members check the current

grain prices in a co-op office. Photos by Roger

Hugenberg, courtesy Ursa Co-op

continued on page 38
By Patrick Duffey, 

USDA Rural Development

e don’t need to store

grain, so why would

we want to form a

cooperative?”

That was the reaction of one potential member with a

fairly narrow view of cooperatives

when Margaret Bau suggested the

Oneida American Indian tribe consider

forming a grocery co-op. A userowned store on the reservation, she

said, could improve food availability,

convenience and affordability for

members of the tribe. It would also

keep more local dollars turning over

on the reservation. However, Bau,

cooperative development specialist for

USDA Rural Development in Wisconsin, had to undertake a two-year co-op

education effort before the concept

took root and blossomed. 

A smaller, privately owned store in

the community had folded earlier

after the owner died. But none of the

area grocery chains were interested

in filling the void on the Oneida

reservation. 

“Early in the process,” Bau recalls,

“one of the community volunteers

expressed disdain for cooperatives. At a

co-op exploratory meeting, I questioned her about the sentiment. She

replied, ‘My elder neighbor said coops—yuck! That’s for grain elevators!’ I

sighed in relief. This was an education

gap we could bridge, not some deepseated cultural issue or an injustice

inflicted years ago by a previous cooperative. We can deal with co-op education issues.”

Building co-op 

customer base

Bau, based at USDA’s office in

Stevens Point, Wis., and other supporters of the co-op concept did their

jobs well. Last July, two years after the

initial meetings, she joined other advisors and members of the Oneida tribe

in opening the Tower Food Co-op.

The name derives from the tall water

tower that dominates the adjoining

business park.

Tower Food Co-op is a modern, rural grocery store and the first of its kind

on a reservation in Wisconsin. The new

cooperative has a potential of serving

20,000 community members. Wisconsin

has 11 Native American reservations,

two of which have tribal-sponsored grocery stores. But neither of those stores is

a user-owned cooperative. 

The store operates with a staff of 15,

but only two are full time. By fall, the

cooperative had already gained more

than 300 members. Annual membership costs $20, or $100 for a lifetime

membership.

“The reaction of the community was

much more positive toward cooperatives than we initially anticipated,” said

Bill Ver Voort, who since 1999 has

been coordinator for Oneida Community Integrated Food Systems (OCIFS),

of which the grocery co-op is a part

(see sidebar). “Although it will take a

while to build our clientele, those who

have shopped here have expressed

amazement and take pride in having

such a store in their community.”

The store has 6,000 square feet of

display space with 2,000 square feet of

storage space. It stocks a wide array of

26 January/February 2003 / Rural Cooperatives

W

Oneida grocery co-op boosts community;

helps keep more money on reservation

Tower Foods is the first tribal-owned cooperative on American Indian land in Wisconsin,

and possibly in the nation. It has a potential market of 20,000 consumers. USDA photos by

Patrick Duffey
canned, packaged and fresh foods. This

fall, beef from the tribe’s 400- head

herd of black angus (all natural, steroid

free) was added to the meat case.

Working with a meatpacker in a neighboring community, the co-op has

begun a brisk retail trade in beef halves,

quarters and wrapped cuts. 

Laying the groundwork 

Jerry Treleven, acting manager of

the Oneida Community Development

Department, and later treasurer of the

co-op board, contacted USDA Rural

Development in Wisconsin about the

project, which had been under study by

tribal leaders since the mid-1990s. Bau

made an initial presentation about the

basics of cooperatives to an Oneida

steering committee of nine community

members and tribal employees in June

of 2000. It was their first direct experience with cooperatives. 

In succeeding months, Bau expanded her presentations to the committee

to examine cooperatives and the roles

of directors, employees and members.

She also made more general presentations about cooperatives to community

groups. 

Bau researched other grocery cooperative as possible business models—

including those handling mostly natural

or conventional groceries and those

serving low-income areas. Wisconsin

has 30 food cooperatives, most of which

sprang to life in the 1970s and 1980s

and specialize in natural foods. Two

rural co-op stores which sell conventional foods were eventually selected as

a model for the Tower Foods Co-op.

“For the next two years, I was invited back about once a month to talk

about structuring the cooperative, discuss legal issues, provide director training and talk about recruiting members,” Bau says. “The Oneida tribe has

very knowledgeable employees, so my

services were more of a consulting

nature on specific cooperative issues.

More often on cooperative development projects, I am used as a facilitator

and organizer. So playing the consultant role was new for me. Bill Ver

Voort was really the point person.” 

Ver Voort was familiar with the

Oneida tribe even before going to work

for them in 1999. As a young man, he

farmed land originally within the reservation boundaries. He went on to

secure a degree at the University of

Wisconsin-Green Bay and spent five

years working with nonprofit organizations, including several years in Thailand teaching English and organizing

an English-language program at four

colleges. After his return to the United

States, Ver Voort went to work for his

former neighbors, coordinating OCIFS

programs that help the tribe achieve its

goal of self-reliance in food production. 

The grocery store steering committee included members with business

experience, but most were not familiar

with a grocery operation, much less a

cooperative. However, Parker Plitz, the

Oneida Nation’s planner, a member of

the store’s new board of directors and

the first to become a member of Tower

Co-op, had earlier organized a foodbuying cooperative, which provided

useful experience. 

Although not initially familiar with

the cooperative business model, initial

store Manager Carl Lorang had 32

years of experience in the grocery business, most of it gained at stores in

Green Bay, and he played a key role in

getting the co-op going. He had

worked for many years with the Super

Valu chain of independent grocers,

which was eventually selected as the

cooperative’s food supplier. 

Trelevan and Ver Voort spent time

learning from the manager of Outpost

Natural Foods Cooperative in Milwaukee, which serves a specialized, urban

market interested in natural and organically grown foods. “That experience

was helpful, but the situation of the

Oneida tribe is more rural in nature

and the community definitely wanted

regular groceries,” Bau explains.

A market analysis showed the community could support a grocery store in

Oneida. Grants were secured and a

location in the tribe’s business park was

selected. A cooperative board of directors was organized and the Oneida

Community Market was incorporated

in November 2001 to operate as a coop. At a subsequent community meeting, products, membership fees, store

hours and store design were discussed.

Contractors were hired to renovate an

existing building. 

USDA, others

provide funding 

USDA Rural Development provided the Oneida Nation with a

Rural Cooperatives / January/February 2003 27

Patricia Cornelius, left, manager of the Oneida Apple Orchard, discusses operations with

Margaret Bau, a cooperative development specialist with USDA Rural Development.
$460,800 revolving-loan grant

through its Rural Business Enterprise

Grant (RBEG) program (see sidebar).

Of that amount, $250,000 was to renovate the existing building, $142,000

for equipment, $23,700 for a smallbusiness incubator project (a revolving loan program), and $45,000 for

the innovative solar system which

generates 34,500 watts of electricity

28 January/February 2003 / Rural Cooperatives

The Oneida grocery cooperative is the newest part of

the Oneida Community Integrated Food Systems (OCIFS)

program, which was initiated in 1944 to address development issues associated with poverty and health programs on the Oneida reservation. The goal of the program is to help the Oneida tribe become self-sufficient

in food. Each component of OCIFS addresses different

food needs in the community.

OCIFS includes a beef operation, Tsyunhehkwa (joonhenk-qua) Center for integrating traditional Oneida agricultural practices with holistic processes, a community

apple orchard/store and a small cannery. 

The apple operation is an example of how the tribe

devotes effort to acquainting youth with agriculture,

stressing the importance of growing healthy food and

finding natural ways to eliminate pests. The tribe has

4,000 fruit trees on 40 acres. 

In the spring, children from the Oneida elementary

school are invited to tour the orchard and learn about

agriculture. The orchard also offers fresh fruit and vegetables to all Oneida tribe members at lower prices than

offered outside the reservation. Food from the orchard is

also furnished to the elderly at the Oneida Senior Center. 

The concept behind the Tsyunhehkwa Center program consists of four interrelated components: traditional wellness, commercial and community agriculture,

commercial food production and community food

preservation. The center is designed to integrate the

best of traditional Oneida agricultural practices with

holistic processes, based on principles of sustainable

development (including economic, ecological and cultural factors). 

The center also researches and develops indigenous

diet and foods and supplies oils and herbs used for medicinal and traditional ceremonial purposes. The holistic

health program teaches people to use herbs, gives massages and sponsors educational workshops on compost

making, indoor seed-starts, edible landscaping, vegetable gardening, backyard livestock production, salve

making and animal care. 

The 83-acre site includes barns, organic gardens, a

greenhouse, free-range chicken production, a hoop

house (an unheated greenhouse to which indoor-bred

plants are transferred for finishing), numerous gardens,

and 38 head of organically raised cattle.

The Oneida Cannery helps members preserve food by

canning, drying, pickling or cooking traditional foods for

special meals or celebrations. Seeds and seedlings are

provided for home gardens. 

The Oneida food distribution program and food

pantry, directed by Nori Damrow, who also serves on

the co-op board, provides low-income community members with food packages from USDA, each worth about

$100 per person per month. The food pantry focuses on

issues low-income community members face, such as

education needs, unemployment and low self- esteem. 

The Oneida Pantry opened in 2000 and is run entirely

by volunteers. Through networking, Paul’s Food Pantry

in Green Bay helped the Oneida tribe organize its pantry,

and both operations trade surplus foods. Fund-raising

efforts—such as luncheon specials, soliciting products

from area retailers and an auction—help to sustain the

pantry. ■

—By Patrick Duffey

Co-op store part of Oneida Food Systems

The Tsyunhehkwa Center promotes events

such as husking bees to connect tribe members with their traditional farming practices.
daily to power the store’s lights and

coolers. 

The Administration for Native

Americans provided an additional

$78,000 grant to cover the cooperative’s building lease for the first two

years and some equipment costs. A

grant from the First Nation’s Development Institute provided $50,000 for a

service road and funds to assist in providing summer employment at the

store for Oneida 4-H members. 

The steering committee worked

with Frieda (Hugo) Clary from the

Oneida Grants Office to develop grant

applications. The Oneida tribal budget

for 2001 included a $250,000 loan to

the cooperative. The loan will gradually

be repaid from store proceeds, starting

in November 2004 as the co-op gains

its financial footing. The tribe will then

use money to lend to other businesses

that locate in the 2,000-square-foot

business park adjoining the cooperative

store. The business park is already

home to a U.S. Post Office facility, an

office building and a food pantry charity. One prospective future tenant is a

traditional native medicine store.

“We expect the co-op grocery will

attract other small businesses,” Ver

Voort said.

When Tower Foods Co-op officially opened for business, it was thanks

not only to USDA assistance, but to

partnerships formed by multiple government agencies, guidance from tribal elders and numerous informational

and training meetings. Assistance

came flowing in from the University

of Wisconsin Center for Cooperatives, North Country Cooperative

Development Fund, National Cooperative Business Association, the Cooperative Grocers’ Informational Network and the Urban Cooperative

Innovative School of Human Ecology

at the University of Wisconsin. A

video about cooperatives from Wisconsin Public Television also proved

to be a useful educational tool. 

Pat Pelky, president of the cooperative board, said he hopes the store will

be “a very sustainable business—part of

the atmosphere around the community

for years to come.”

Bison meat featured;

tribe building herd 

One important product featured at

the co-op market is bison meat, which

has strong cultural and dietary significance for American Indians. Bison was,

of course, once a staple for many tribes,

and the Oneida Nation is building its

own herd. It is one of 50 tribal members of the Inter-Tribal Bison Cooperative (ITBC), which has member-tribes

in 17 states. 

In the1838 Treaty of Oak Creek, the federal government deeded a 65,000-acre reservation to the Oneida

Nation when a segment of the tribe was transferred

from New York to Wisconsin. Tribal lore has it that Oneida runners were sent ahead to scout prospective relocation sites. These scouts reported back that proposed

terrain in Kansas was too sandy, so the tribe opted for

Wisconsin as more suited to its agrarian needs.

The tribe’s land holdings diminished over the years,

and currently comprise about 12,000 acres spread out

within the boundaries of the original reservation. The

Oneida lands straddle Outagamie and Brown counties,

just west of Green Bay, in northeastern Wisconsin.

In recent years, the tribe has been repurchasing some

of the lost acres, including a 30-acre apple orchard. The

Oneida farming operations cover 7,000 acres, 3,000 acres

of which are tillable, with the rest enrolled in various conservation and wildlife programs. ■

Treaty of Oak Creek moved Oneida tribe to Wisconsin 

Rural Cooperatives / January/February 2003 29

Solar panels behind the Tower Foods co-op supply energy to run the store’s lights

and coolers.
30 January/February 2003 / Rural Cooperatives

The Rural Business-Cooperative Service (RBS)—part

of USDA Rural Development—provides grants under the

Rural Business Enterprise Grants (RBEG) program to

public bodies, private nonprofit corporations and federally recognized American Indian tribal groups. The

grants are issued to these entities, which in turn lend

the money to finance development of small and emerging private businesses. USDA grants do not go directly

to a business. 

Eligible public bodies include incorporated towns and

villages, boroughs, townships, counties, states, authorities, districts, American Indian tribes on federal and

state reservations, and other federally recognized Indian

tribal groups in rural areas. Small and emerging businesses assisted must have less than 50 new employees

and less than $1 million in gross annual revenues. 

Funds may be used for technical assistance (including marketing studies, feasibility studies, business plans,

training, etc.), purchasing or leasing machinery and

equipment; creating a revolving loan fund for small and

emerging business (providing them partial funding for

the purchase of equipment, working capital or real

estate), or constructing a building for a business incubator. Grants cannot be used for agricultural production,

among other prohibitions.

For more information, visit:

http://www.rurdev.usda.gov/rbs/busp/rbeg.htm , or call

(202) 720-1400. ■

USDA’s RBEG program stimulates business 

creation on reservations, other rural areas 

In 1997, the Oneida Nation received

an ITBC grant of 13 buffalo from the

Wind Cave National Park at Hot

Springs, S. D. In 2001, it received

another grant of 15 female buffalo

from Fort Niobrara Refuge at Lincoln,

Neb. This will allow the herd to reproduce in numbers that should make it

self-sustaining. 

Bison meat, introduced at the store

a few months ago, will be given an

increasing amount of space in the coop store as the tribe’s herd grows. In

addition to serving as a spiritual link

to their past for the Oneida tribe,

leaner buffalo meat is well-suited to

the diet of Native Americans. Diabetes is a common ailment on many

reservations (nearly half of the Oneida tribe suffer from it). Louis La

Rosa, secretary of the

Inter-Tribal Bison Cooperative, says there is some

evidence that bison meat

may help in controlling

diabetes. The store also

stocks a 12-foot section of

food items for diabetics. 

The cooperative advertises as its budget allows.

The tribe’s internal e-mail

system reaches 2,500 people and carries store advertising every week. In-store weekly special sheets are inserted in each

customer’s grocery bag and every other

week an advertisement appears in the

Green Bay Press-Gazette. A special

“Wall of Values” at the front of the

store promotes products on sale each

week. 

Store integrating into

tribal community life 

Efforts are being made to broadly

integrate the store into Oneida community life. A farmer’s market that

offers fresh, locally grown produce is

operating near the store. It also offers a

place for community members to sell

other products. 

Acting on a suggestion from Ver

Voort, the Falling Leaves 4-H club in

Oneida was organized last fall by

Jeanne Baum, 4-H youth development leader for Outagamie County.

Six 4-H volunteer leaders have

already been trained. Only 10 percent

of the county’s 4-H members come

from an agricultural background. The

co-op is providing job training for 4-H

members and provides the club and

other youth groups—including Boy

Scouts, Girl Scouts and Future Farmers of America (FFA)—with space for

fund-raising activities. Ver Voort

asked officials of the nearby Seymour

High School to have its vocational

shop program build a booth that will

be placed next to the store for fundraising efforts. 

The 4-H club, which does not limit

membership to the tribe, undertook a

tree-planting conservation project as its

first activity. Spring plans call for planting an additional 1,000 trees. The club

is generating interest among youth in

the tribe’s agrarian roots and will focus

on Oneida cultural activities.

In these and other ways, the Oneida

Nation is setting a pattern that could

be used by other American Indian

tribes nationwide to harness the power

of a food cooperative to sustain their

members and strengthen ties to nearby

communities. ■

The Oneida tribal seal is incorporated into the tribe’s

apple orchard logo.
Beverly L. Rotan

USDA/RBS Economist 

ven with near-record

sales by cooperatives in

2001, some cooperatives

experienced losses. In

today’s economic climate,

many for-profit businesses, as well as

cooperatives, have had to pursue mergers, consolidations, staff reductions and

even reorganization under the bankruptcy courts in order to survive. 

Factors spurring some of these situations included mismanagement, continued fluctuations in costs, low levels

of member participation, depressed

farm prices, drought, rising operating

expenses, outside competition and other forces. Cooperative management

must be ever vigilant and aware of a

cooperative’s strengths and weaknesses

as they relate to sales, cash flow,

accounts receivable, inventory mix

and/or debt. 

Some performance factors are within the control of cooperative management, but other factors are not. One

way to become aware of the performance of your cooperative is through

financial statements and ratios. Ratios

that help assess your cooperative’s performance include:

1. Liquidity ratios—focus on a company’s ability to pay bills when due. If

liquidity ratios remain relatively high

for a prolonged period, too much capital may be invested in liquid assets (for

example, cash, short-term investments,

accounts receivable and inventory) and

too little is devoted to increasing member equity. These ratios should equal

one or more.

2. Leverage ratios—reveal a company’s

use of borrowed funds (rather than

members’ equity for investments) to

expand its business. The goal is to borrow funds at a low interest rate and

invest in business activity that produces

a high rate of return, exceeding the target rate of return for investment. Debtto-equity ratio measures the long-term

solvency of a company by comparing

debt to net worth. A company with a

high debt-to-equity ratio could have

trouble meeting fixed interest/debt

payments if business falters or does not

grow as planned. Most lenders would

prefer this ratio to be 3 or lower.

3. Activity ratio turnover—also called

“efficiency ratios,” measure activity or

changes in certain assets. Poor

turnover generally indicates resources

are invested in non-income-producing

assets. The inventory turnover ratio

measures how quickly inventory is sold

and replaced each year. An inventory

turnover of 12 means inventory is sold

(turned over) once each month. The

times-interest-earned ratio measures a

company’s ability to make interest payments on debt. If the ratio does not

exceed the interest rate on current

debt, the business may not be making

enough to pay interest expenses. 

4. Profitability ratios—vary from

industry to industry and should be compared to a company’s ratios for prior

years/periods. The return-on-assets

measures how well a company is using

its assets to generate net profits. The

return-on-member equity ratio measures

a company’s return on members’ money. 

USDA surveyed 294 cooperatives,

which provided information for an

upcoming USDA research report

(“Analysis of Financial Statements:

Local Farm Supply, Marketing Cooperatives, 2001,” Research Report

197). For the most part, ratios for the

surveyed cooperatives remained relaRural Cooperatives / January/February 2003 31

E

Local co-ops’ net income 

and sales climb in 2001

Table 1—Financial analysis ratios for all cooperatives,

2000 and 2001

Ratio 2000 2001

Current 1.35 1.34

Quick 0.68 0.65

Debt 0.44 0.45

Debt-to-total equity 0.81 0.81

Times-interest-earned 2.81 2.90

Total-asset turnover 1.93 1.97

Fixed-asset turnover 6.61 7.11

Gross profit margin 12.70 12.74

Return-on-total assets before

interest & taxes 5.54 5.78

Return-on-total equity 7.91 8.70
tively unchanged from 2000 to 2001

(table 1). Local co-op savings were up

11 percent and patronage from

regional cooperatives increased 13

percent in 2001. 

About 15 percent of the cooperatives in the data base had losses in

2001. Through patronage refunds,

regionals were an important source of

revenues and allowed 26 (out of 44)

cooperatives that had local losses to

instead show net income for the year.

Net income averaged almost

$259,000 in 2001, up from $231,000

in 2000, a 12-percent increase.

The co-ops in the data base were

grouped into four categories: small,

medium, large and super (table 2).

Sales by local cooperatives of major

farm supplies (feed, seed, fertilizer,

chemicals, petroleum and farm supplies) averaged $9.3 million in 2001, a

10-percent increase from $8.4 million

in 2000. 

Both fertilizer and petroleum sales

increased about 18 percent between the

2 years (table 3). The increases were

due to the rise in propane prices.

Propane is used to heat farm homes

and as a component in anhydrous

ammonia fertilizers. 

Seed sale averages also climbed

sharply, up 23 percent, to $282,000 per

local co-op in 2001. In fact, every category (with the exception of crop protectants) of farm supply sales increased

from 2000 to 2001. In the overall

scheme of things, not all farm supplies

experienced increases in sales—chemicals, machinery, building materials,

containers and food sales decreased.

The total sales (from commodity

marketing and farm supplies) average

rose to more than $14.8 million in

2001. Marketing farm commodity sales

(crops and livestock) showed a small

increase in 2001. Grain sales only

increased about 3 percent. Even with

high market prices and production in

2001, on average, these sales amounted

to $5 million. Service income increased

a little over 1 percent.

Both current assets and total assets

were up slightly, 7 and 5 percent,

respectively, for the 294 co-ops surveyed. Investments increased in property, plant and equipment, inventories (grain/oilseed and farm supplies)

and accounts receivable.

32 January/February 2003 / Rural Cooperatives

Table 2—Size and type definitions used for respondent cooperatives

Cooperative size Definition Number

Small up to $5 million in total sales 92

Medium over $5 million to $10 million 71

Large over $10 million to $20 million 59

Super over $20 million 72

Cooperative type

Farm supply total net sales from farm supplies 152

Mixed farm supply from 50 to 99 percent 67

Mixed marketing from 25 to 49 percent 57

Marketing less than 25 percent 18

Table 3—Average farm supplies sold and products marketed; change from 2000 and 2001

Change:

2000 2001 2000 to 2001

—— Dollars —— Percent

Farm supplies sold: 

Feed 1,376,265 1,402,410 1.90

Seed 229,504 282,319 23.01

Fertilizer 1,486,326 1,755,377 18.10

Crop protectants 1,268,150 1,259,834 -0.66

Petroleum products 2,891,718 3,408,060 17.86

Other 1,149,898 1,164,804 1.30

Total 8,401,855 9,272,804 10.37 

Products marketed:

Grains and oilseeds 5,320,822 5,460,369 2.62

Other 72,487 73,609 1.55

Total 5,393,309 5,533,978 2.61

Total sales $13,795,164 $14,766,182 7.33
Rural Cooperatives / January/February 2003 33

Current liabilities for local co-ops

jumped nearly 8 percent during the

two-year study period, with patrons’

credit balances, taxes payable and

accounts payable showing double-digit

increases. Revolving equity redeemed

had the largest decrease (-14.5 percent)

in this category, reflecting multiple

causes, including: losses allocated from

previous years, some cooperatives didn’t need more capital, mergers, capital

stock buy-back, etc. 

Growth was also experienced in

accrued expenses, as well as in current

and long-term debt. Cash patronage

refunds and seasonal debt decreased.

Cost of goods sold and revenue

almost offset each other in 2000, with

cost of goods sold rising 7 percent. Cost

of goods sold averaged almost 87 percent of net sales. Total expenses climbed

about 7 percent in 2001. Utility costs

increased the most. These factors may

be the reasons some cooperatives had

net income losses for the year.

Co-ops in the study had an average

of 39 employees (part- and full-time),

who earned an average salary of

$24,863. Total employee expenses

were up about 6 percent in 2001.

Directors’ fees and expenses were a

small part of total costs. However,

director compensation is an important

factor that helps many cooperatives

convince producers to divert time

each month to helping guide their

cooperative. Co-op boards averaged

seven members, who were paid an

average of $886 per year. 

Local agricultural cooperatives continued to play a vital role in supplying

goods and services to their farmermembers and marketing their crops.

Local co-ops are also important to rural communities, where they are often

one of the largest employers and generate considerable tax revenues for

their communities. ■

Turkey growers grateful for Nebraska, Michigan co-ops

Turkey growers in Nebraska and Michigan were grateful for cooperative

markets this past fall. Four years ago, Michigan growers lost their contract

when Bill Marr Foods, part of Sara Lee Corp., moved its boning and slaughtering operations to Iowa. That left local farmers with no processing plants

in the state. To compensate, they formed Michigan Turkey Producers Cooperative and opened a processing plant at Wyoming, Mich., in 2001. “Today,

the plant is a dream come true. It employs nearly 400 workers and processes more than 4 million turkeys a year. The cooperative now has 16 farmers

raising turkeys on 43 farms,” said CEO Dan Lennon. “Co-op members

account for 90 percent of the 4.5 million turkeys raised in Michigan each

year. At the moment, the cooperative sells its meat raw, but anticipates

cooking meat directly in a couple years,” he said. 

Meanwhile, west of the Mississippi, the experience of co-op turkey growers in Nebraska has a longer history, but the same gratitude for a cooperative

market still exists. The state’s turkey industry is a year-round business worth

$35 million annually to the state’s economy. While Deb Van Matre has only

managed Nebraska Turkey Growers for the past two years, she’s been associated with the cooperative and its 20 members for the past 19 years. 

The cooperative will mark its 65th anniversary in February. Each member

is an independent grower, supplying their own feed, birds and facilities.

Each year, they sign a marketing agreement with the cooperative to supply

turkeys to the plant at Gibbon. Members elect the seven-person board.

For marketing services, the Nebraska cooperative turns to Norbest cooperative of Midvale, Utah. The majority of the birds

are packaged under the Norbest Nebraska-grown label. The Nebraska members receive baby turkeys from a hatchery, raise

them from 12 to 14 weeks and produce as many as seven cycles of bird a year. The plant processes about 4 million turkeys a

year, or about 50 million pounds. That compares to just 12 million pounds when the cooperative started. Van Matre expects to

hit peak production for the 2003 season. The plant employs 225 people and has an annual payroll of about $4 million.

Van Matre is optimistic about the cooperative’s future and expects turkey consumption to continue increasing. “We

are looking at future expansion at the plant and considering adding new products. We are in some planning stages now for

that over the next three years,” she said. ■

A new, co-op turkey packing plant in

Michigan is processing 4 million birds per

year. USDA Agricultural Research Service Photo 
34 January/February 2003 / Rural Cooperatives

West Central Soy receives

value-added ag award

West Central Soy, a subsidiary of

West Central Cooperative of Ralston,

Iowa, is the recipient of the 2002 “Value-Added Agriculture” Iowa Venture

award. The award recognizes significant

contributions and leadership in promoting and developing Iowa agriculture. 

West Central Soy and its cooperative members have built the largest,

state-of-the-art soy diesel facility in the

country. A fuel of the future, biodiesel

is a clean-burning fuel that meets the

toughest pollution standards. West

Central will produce 12 million gallons

of biodiesel from 12.5 million bushels

of soybeans annually at its Ralston

facility in Carroll County. 

“This is the sixth year we have recognized Iowa ag enterprises for providing jobs, investment and leadership to

local economies,” says Rand M. Fisher,

president of the Iowa Area Development Group (IADG), who presented

the award Dec. 4 at the Iowa Farm

Bureau annual meeting in Des Moines.

“The economic impact of biobased

fuels in Iowa is huge. Together, soybean

and corn farmers are helping reduce

dependency on foreign sources of oil

while enhancing air and water quality.

The investment by this farmer-owned

cooperative will strengthen our state, its

communities and the families of Iowa.” 

IADG, the business development

arm for Iowa’s rural electric cooperatives, is in a partnership with the Iowa

Farm Bureau Federation to advance

value-added agriculture to expand economic opportunity and increase farm

income. Previous award winners

include the Iowa Farm Bureau Federation, Southwest Iowa Egg, Wells Dairy,

West Liberty Foods, Tall Corn Ethanol, Midwest Grain Processors, Quad

County Corn Processors and Siouxland

Energy & Livestock. 

Upstate Dairy Co-op 

targets teen market 

In response to a national study indicating interest by teenagers in singleserve flavored milk from vending

machines, Upstate Farms Cooperative

at LeRoy, N.Y., has been pursuing this

market at more than 45 schools and universities across the state. Milk sales from

vending machines have increased 300

percent. “Intense” chocolate and vanilla

are the most popular flavors. Two years

ago, the cooperative used 15 machines

to conduct test studies in small schools. 

“It’s proving to be a popular alternative to carbonated beverages,” said

Mark Serling, marketing director for

Upstate Farms. “The idea for milk

vending came after we switched to

using plastic bottles. The next step is to

bring more product offerings into the

schools and other flavors.” 

Growmark purchases Agway’s 

agronomy, seed businesses

Agricultural supplier GROWMARK Inc., of Bloomington, Ill., has

sealed the purchase of the agronomy

and seed business units of Agway Inc.,

Syracuse, N.Y. The deal includes the

assets of Seedway Inc. production facilities, wholesale and retail agronomy

facilities plus Agway’s equity interest in

CF Industries and Allied Seed LLC.

Bill Davisson, GROWMARK CEO,

has named Ed Rodenburg, vice president of eastern retail operations, to head

the cooperative’s new Northeast operations. He had been the cooperative’s

Ontario region manager in 1994 and

later managed the agribusiness of Agricore in Calgary, Alberta, Canada before

rejoining GROWMARK in October.

“As we bring the red and black ‘FS’

brand to farmers in the eastern United

States, I’m confident they will be beneficiaries of the professional people,

product and services that create solutions to farmers’ unique challenges,”

Davisson said. “Our vision is to

improve long-term farm profitability

through innovation and commitment

to excellence.”

GROWMARK provides agriculturalrelated products and services to local

cooperatives in Illinois, Iowa, Wisconsin and the Canadian province of

Ontario. GROWMARK’s predecessor,

FS Services, was one of the founding

NEWSLINE

Compiled by Patrick Duffey

Upstate Dairy Cooperative is having good

results using vending machines to sell flavored milk to teenagers. Photo courtesy

Upstate Dairy Co-op
Rural Cooperatives / January/February 2003 35

cooperatives of CF Industries. Davisson is currently board chairman of the

interregional fertilizer manufacturing

and distribution cooperative.

Meanwhile, due diligence is expected to be completed by Jan. 1, 2003, in

the alignment between GROWMARK’s

consumer division and Country Depot

franchise dealerships and TruServ

Canada’s chain of cooperative hardware

stores. The original letter of intent to

align was signed Sept. 11. Details of

the combination are pending. GROWMARK has had a presence in Canada

since it purchased United Cooperatives

of Ontario in 1994.

Agri-Mark to buy

McCadam Cheese 

Expansion of its cheese business and

merger of a local farm supply cooperative are on the business agenda of AgriMark, a dairy marketing cooperative

based at Metheun, Mass. Both transactions should be completed by the end of

January 2003. Agri-Mark plans to purchase McCadam Cheese at Chateaugay,

N.Y., from Valio Limited of Finland,

which includes cheese manufacturing

assets in which McCadam produces

award-winning New York Cheddar

cheese, Muenster, Colby and other

cheeses, including European varieties.

The deal is contingent upon a merger between Agri-Mark and the 150-

member Chateaugay Cooperative,

which co-owns the cheese plant with

Valio. The farm supply cooperative’s

board of directors has already endorsed

the pact with Agri-Mark, which has

1,400 members in six New England

states and New York. Sales reached

$625 million in fiscal 2001. The cooperative markets much of its milk

nationwide through its Cabot brand of

Vermont Cheddar cheese, butter and

other dairy products. The balance of its

milk is marketed to dairy processors in

the eastern United States. The cooperative owns three processing plants. 

The cut-and-wrap portion of

McCadam operations at Heuvelton,

N.Y., located 150 miles north of Syracuse, will be transferred to Agri-Mark’s

Cabot facilities in Vermont. McCadam

had been shipping cheese from

Chateaugay to Heuvelton for storage,

curing, packaging and distribution. Brian Lee, McCadam president and manager, lamented the loss of up to 110 of

the 130 jobs at the plant. But in the

broader view, he said, “the sale by a foreign owner 7,000 miles away to a cooperative of American dairy farmers is a

good thing. McCadam cheese will

be available to a wider market.”

The warehouse and direct-tostore delivery operations will be

retained at Heuvelton. 

The cheese company was

founded there in 1876 by William

McCadam. The firm became a

wholly owned subsidiary of Dean

Foods which purchased it 1972,

but then sold it to Valio in 1991.

Paul Johnson, Agri-Mark president, said McCadam’s $60 million

in annual sales would complement

the Cabot brand of dairy products.

“Nothing is stronger in the marketplace

than farmers working together,”

observed Chairman Carl Peterson. He

said the combination would help “propel

the McCadam business to new levels of

market growth and profitability for dairy

farmers.” The Chateaugay farm supply

store next to the cheese plant will continue to be operated and serve local

farmers.

Farmland gets extension;

2002 losses at $346 million

Farmland Industries has been given

an additional four months, until March

27, to complete and file its reorganization plan needed to emerge from

Chapter 11 bankruptcy. As of this writing in early December, the co-op was

still working to extend agreements with

its bankers. 

The co-op reported $346 million in

losses for fiscal year 2002. The loss was

before taxes, and includes one-time

restructuring and reorganization

expenses and losses from discontinued

operations.

Despite overall red ink, Farmland’s

refrigerated foods business sales

climbed 72 percent, to $59.7 million,

during 2002. Sales were up 3 percent

for further-processed meat, an area on

which Farmland hopes to pin its future.

“Our focus on further-processed meats,

including our leadership position on

CaseReady pork and beef, strengthened margins considerably,” reported

CEO Robert Terry. Still pending is the

sale or repositioning of Farmland’s fertilizer and petroleum assets to erase

some of that red ink. 

Farmland’s sales for fiscal 2000 were

$6.6 billion, down from $9.2 billion in

2001. The decline was partly due to the

formation in 2001 of ADM-Farmland,

a grain marketing company wholly

owned by Archer Daniels Midland

(ADM) but supplied by the Farmland

cooperative system. Farmland’s grain

sales in 2001 reached $1.7 billion. Terry said Farmland’s reorganization plan

represented commitments to progress

rapidly and thoroughly by working

closely with committees representing

unsecured creditors and bond holders. 

American Crystal Co-op pays 

$34 million for sugar plants

Three sugar processing plants in

Torrington, Wyo., Sidney, Mont. and

Hereford, Texas, have been purchased

by American Crystal Sugar Co. of

Moorehead, Minn., for $34 million

from Imperial Sugar Co. The Torrington plant will be leased to Western

Sugar Cooperative of Denver. American Crystal will operate the Sidney

plant, while the Hereford factory, idled

since 1998, will not be immediately

reopened. Jim Horvath, American

Crystal president, said the additional
acreage and processing capacity at Sidney “will add value to our cooperative’s

customers, shareholders and the Sidney

community alike.” About 11,800 acres

are being harvested for the Torrington

plant this year vs. 30,000 acres 2 years

ago. American Crystal has two plants in

North Dakota and three in Minnesota.

Graves joins USDA advisors 

David Graves, president of the

National Council of Farmer Cooperatives, Washington, D.C., is among 11

new members of the U. S. Department

of Agriculture’s National Agricultural

Research, Extension, Education and

Economics advisory committee. He was

appointed by Agricultural Secretary Ann

Veneman to advise on USDA research,

education and extension policies and

priorities. The 30-member board was

reauthorized in the 2002 farm bill. 

Improving denim market 

sparks PCCA rebound

Despite early losses as it exited the

yarn-dyed business, Plains Cotton

Cooperative Association (PCCA) at

Lubbock, Texas, rebounded from a

sub-par year in 2001, thanks in part to

an improved denim market, President

Van May told shareholders at the 49th

annual meeting in September. Total net

margins reached $3.5 million. The

cooperative distributed $11.2 million in

cash payments to members, $5.2 million to marketing, warehouse and pool

patrons, $943,000 in stock retirements

and about $5.1 million for retiring perunit retains. 

The Mission Valley Fabrics facility

was converted to yarn spinning, denim weaving and finishing due to a

heavy flow of cheap, imported textiles

and apparel from Asia. All denim

weaving was relocated to PCCA’s

American Cotton Growers plant at

Littlefield, Texas. “The improved

denim market enabled us to work

more closely with our major customer

and we have expanded our customer

list to insulate us from any single customer having a difficult time in the

market,” May said. New denim products and finishes, he noted, increased

flexibility in meeting customer needs

and improving earnings.

36 January/February 2003 / Rural Cooperatives

Meeting the Challenge continued from page 6

damaging as any failure in financial oversight.

5. Seek efficient structures. As farmers and cooperatives

enter the 21st century, traditional structure is under severe

pressure. When profit margins are thin, internal conflicts

among the layers of decision makers in a federated system—as

each strives to capture what margins there are—can become

debilitating. Also, assets are tied up in farm supply manufacturing facilities and grain elevators that might be better deployed

in information technology and value-added food processing.

Large, federated cooperatives are facing intense competitive pressure. In some cases, smaller, centralized associations

will be able to function with less capital and to make management decisions relatively quickly. When these associations

see an opportunity that is beyond their reach, they may be

better off forming a joint venture with other cooperative and

non-cooperative firms than forming a federated cooperative.

This provides access to people, funding and markets not otherwise available while they continue to function as an independent cooperative organization.

Farmer-members must ask themselves some fundamental

questions: Do they have to own physical assets they can see

and touch? Can they operate in an environment of shared

control and benefits? Can they allow their cooperative businesses to evolve and change?

6. Forge a strong public policy presence. Government

decisions will play an important part in the future of cooperatives. Farmers and cooperatives will receive few favorable laws

or administrative decisions just because they think they deserve

them. Good policy outcomes, like good business outcomes, are

usually the result of careful planning and hard work.

In the 21st century, cooperatives must enhance their role

in protecting and advancing the political interests of farmers.

This includes educating legislators regarding how cooperatives might receive stronger support in terms of access to and

assistance from federal and state programs. It also means collaborating with program administrators to make sure producer-members receive the maximum benefit, or suffer the least

possible harm, from public sector initiatives.

7. Make decisions based on cooperative principles.

The core cooperative principles (user-ownership, user-control and user-benefit) make the cooperative a unique form of

organization with distinct characteristics, strengths and difficulties. While all three principles are important, the concept

of user-control seems most critical to operating on a cooperative basis. As cooperative members struggle to adjust to the

demands of the 21st century, they may find that flexibility is

necessary to protect the continued availability of a cooperative presence in the industries where they do business. But

only through continued user control can the members ensure

that these deviations from the norm don’t transform their

“cooperative” into just another investor-owned firm. It is

through control that members ensure business outcomes

consistent with their goals for their cooperatives.

Control is the ability to make the decisions that determine

how the entity conducts itself. Member-users can have 100

percent of the voting rights and still give away control to

management, lenders, outside equity holders or advisors. To

increase the likelihood of success for the greatest number of

cooperatives in the 21st century, the single most critical recommendation of those who participated in USDA’s focus

group meetings is this: cooperatives must have highly competent directors who understand how to exercise effective control over their cooperatives and do so in a manner that promotes the best interests of the member-users. ■
Rural Cooperatives / January/February 2003 37

GROWMARK turns 75

with sales of $1.3 billion

It started with the delivery of rail tank

cars of kerosene destined for Illinois

farms in the 1920s. Seventy-five years

later, GROWMARK recorded earnings

of $17.5 million on sales of $1.3 billion

in the midst of a nationwide downturn in

many parts of agriculture. Member companies will share patronage refunds of

$14.4 million for 2002. Those marks are

down from fiscal 2001, when the cooperative showed earning of $18.3 million

based on sales of $1.4 billion. 

While National Cooperative Refinery Association (NCRA) provided

$14.4 million in petroleum patronage,

a depressed fertilizer industry prevented the co-op from collecting patronage

refunds from CF Industries, a fertilizer

manufacturing company it is part owner of. UPI, an Ontario-based petroleum company owned jointly by

GROWMARK and Sonoco, provided

a $1 million dividend to the cooperative. Member companies will share $1

million in patronage from the feed

alliance with Land O’Lakes. Grain volume through a joint venture formed 17

years ago with Archer Daniels Midland

was up 3 percent. 

CEO Bill Davisson has set twin

goals of increasing revenue while controlling costs. One goal is to earn $15

million before patronage from NCRA

and CF. “Profitable growth will come

from increased market share with all

members and increased number of

members in an expanded geography,”

he said. “The GROWMARK system

deals in a $60 billion market in our

core geography. A market share

increase of just 1 percent across our

system could result in a sales increase

of $60 million and, in turn, produce

the $15 million income goal.”

Increased share has accompanied geographic growth in recent years.

Davisson said meeting the income

goal would help the cooperative revolve

equity in accordance with its base plan

“to keep ownership in the hands of

those who rely on their regional cooperative. It would build the system’s base

capital through retained earnings, providing both a safety net in cyclical

downturns and a resource base to allow

us to capitalize on opportunities.” 

Chairman Dan Kelley credited

progress to concentrating on the cooperative’s core business in agronomy,

energy and grain marketing. He said

the cooperative needed to strengthen

its seed area because “better seed technology will be an important addition

over the next 5 to 10 years.” 

Meanwhile, the cooperative has

begun supplying its member companies with soybean-based lubricants

based on technology developed by

researchers at the University of Northern Iowa in 1991. Environmental

Lubricants Manufacturing Inc. was

formed to transfer the technology into

commercial soy-based products, such

as bar/chain and gear lubricants, truck

grease and industrial and tractor

hydraulic fluids. The lubricants are

biodegradable and less toxic than traNegotiating the crossroads continued from page 9

• maintain a strong balance sheet

and promote member investment

in the co-op;

• reduce system costs;

• don’t try to be all things to all 

people;

• a mature industry warrants

change, but position the co-op

prudently;

• work to keep the cooperative system (your system) viable and

strong; and

• keep up with farming trends, seeking opportunity where feasible.

One of the implicit themes in each

of these lessons is cooperative education. Education about your cooperative

— how it is uniquely structured and

governed, how it fits in the marketplace, how it adds to a strong overall

cooperative system and how it affords

benefits to members that would be

sorely missed if it were gone.

This education and communication

effort must consistently be provided to

current members, prospective members

and even to the general public in communities where your cooperative conducts business. Educational initiatives

with 4-H, FFA and other youth groups

are especially important. Directors are

strongly reminded to do their utmost

to keep well versed and educated about

the increasingly complex issues faced in

carrying out your critical duties and

responsibilities.

Each one of you—whether a director,

management team member, employee or

member—must be an “educator” in the

true sense of the word.

Finally, when we have seen cooperatives falter, it is important to recognize

that it is because of a business problem,

not a cooperative problem. The current problems with a depressed economy have hit farmers especially hard and

have presented new challenges and

problems to solve in cooperative businesses. Rather than pretend that these

issues do not exist, or will soon go away

and that things will always stay the

same, board members, working in concert with management, must forthrightly direct attention to them. 

I hope all of us here today understand that the cooperative model of

doing business remains strong and a

valid means for farmer-members to

work together for their economic

good. ■

GROWMARK is supplying its member coops with soybean-based diesel fuel and

lubricants. Photo courtesy GROWMARK
38 January/February 2003 / Rural Cooperatives

restructuring plan called for exiting several profitable businesses to raise cash to

reduce debt, a red flag. Another warning

was Agway’s failure to sell its leasing

division Telmark, which led to severe

financial distress for the co-op, the

report said.

Agway’s announcement on June 14

that it would no longer repurchase

subordinated debt was yet another

warning sign, as was the simultaneous

resignation of Agway’s two outside,

non-member board directors in June.

There was no press release announcing their resignation, another red flag,

the report said.

Agway also filed its annual report

and required SEC filing as late as possible. It hadn’t done that in other years.

The report says that while Agway is

struggling, the cooperative remains a

major competitive force in the Northeast and helps drive down prices for all

farmers.

Members, directors and managers

are all accountable for Agway’s troubles, the report concludes: Members

have asked Agway to do too much

without considering the costs involved;

directors didn’t always demand profitable results; and managers sometimes

selected the wrong strategies.

Agriculture has changed in the past

30 years, as has the way farmers buy

their supplies.

“The market has changed quickly

and dramatically for supply cooperatives, and Agway was slow to react,”

Anderson said. “We think they just didn’t move quickly enough.”

Agway’s Hoefer agreed that the consolidation and concentration of agriculture has changed rapidly.

“In some cases, we’ve been slower

than the marketplace in our response,”

he said. “But there have been a lot of

challenges in response to those changes

in agriculture.” Agway officials

received a copy of the report as a courtesy, the professors said. ■

The Herald Co, Syracuse, N.Y., 2002; The

Post-Standard; All Rights Reserved;

Used with permission.

ditional lubricants made from petroleum. 

More than 15 millions gallons of soy

biodiesel were sold by 35 member cooperatives this spring. Nearly 75 percent

of the gasoline sold in the GROWMARK system contained ethanol.

Davisson said the renewable “homegrown fuels” are good for the environment, agriculture and in reducing our

dependence on foreign sources of fuel.

CHS nets $126 million

CHS Cooperatives reported net

income of $126 million for fiscal 2002,

down more than $50 million from

2001. But CEO John Johnson said performance was ahead of budget for

every major business unit of the Minnesota cooperative. Consolidated sales

of $7.73 billion were near the $7.75

billion mark for 2001. 

“As we pursue our vision as an agricultural supply and grain-based foods

system, CHS will continue to measure

decisions on future projects and acquisitions against our priorities of maintaining a solid financial foundation and

investment-grade balance sheet,”Johnson said. CHS handled 1.2 billion

bushels of grain, the eighth consecutive

year the cooperative has moved more

than 1 billion bushels. Earnings in

agronomy, country operations, grain

marketing, oil seeds processing and

foods were ahead of 2001, as were

earnings from processed grains and

foods. Wheat milling operations were

shifted into Horizon Milling LLC, a

joint venture with Cargill Inc. CHS

owns 24 percent of the venture. Energy

earnings also were significantly ahead

of budget. 

What went wrong at Agway? continued from page 15

keting members pay a per-acre fee for

this service. 

New Tools: Rising levels of participation in UFM resulted in the co-op

turning to a local computer programmer to create a new database. This software program allows producers to

review hypothetical marketing scenarios, weighing benefits against profitability objectives. It includes key customer

financial information, such as financial

obligations, farm history (including

yield and revenue), crop insurance revenue guarantees and expected profitability based on net present value. At

any point, producers can see the result

of forward pricing, ag options and current price vs. what the expected profitability outcome would be. This then

can be weighed against expectations. 

Co-op leaders credit the computer

program with helping to keep participation retention in the program

running in the high 90-percentile

range. UFM recently entered into a

contractual arrangement to sell this

software to AgVantage Software, in

Rochester, Minn., which is marketing it as part of a package with other

existing software for producers. 

Contact phone: (217) 964-2111; 

fax: (217) 964-2260; Web site:

www.ursacoop.com; e-mail:

rlhugen@adams.net. ■

Focus On ... continued from page 26

The “Focus on...” section of the magazine

is intended to showcase cooperatives that

are finding innovative ways to deal with a

marketing or member services challenge. If

you would like to see your co-op featured

in this space, please send an e-mail, briefly

stating how you are meeting a key challenge, to: dan.campbell@usda.gov, or call

the editor at (202) 720-6483.
Rural Cooperatives / January/February 2003 39
40 January/February 2003 / Rural Cooperatives

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